The short answer
Break-even sales = fixed costs ÷ (price − variable cost per sale). The bit in brackets is called the contribution: what each sale leaves over to pay for fixed costs.
- Contribution per sale£25 − £10£15
- Fixed costs a year£30,000
- Break-even sales£30,000 ÷ £152,000
Fixed and variable costs
The answer is only as good as the way you split your costs. Ask of each cost: does it change when I sell one more?
- Premises
- Rent, business rates, utilities
- People
- Salaried staff, your accountant
- Running
- Insurance, software, phone
- Finance
- Loan repayments, lease payments
- Product
- Stock, ingredients, materials
- Selling
- Card fees, marketplace commission
- Delivery
- Postage, packaging, couriers
- Labour
- Piece-rate or per-job subcontractors
Some costs are a mix. A phone contract with a fixed monthly fee and a per-call charge, or staff whose hours rise in busy months, can be split into a fixed part and a variable part. If you are not sure, treat a cost as fixed: it makes the break-even point higher, which is the safer mistake.
Use figures before VAT
If you are VAT-registered, use prices and costs before VAT. The VAT you charge goes to HMRC and the VAT you pay is reclaimed, so neither belongs in the sum. If you are not registered, include the VAT you pay in your costs.
The break-even formula
Every sale does two things: it pays for its own variable cost, and it leaves a contribution towards fixed costs.
- Contribution per sale = price − variable cost per sale
- Break-even sales = fixed costs ÷ contribution per sale
- Profit = (sales × contribution) − fixed costs
Round break-even sales up to a whole number. You cannot sell part of an item, and 1,999.6 sales still leaves you short.
If the price is at or below the variable cost, the contribution is zero or negative and there is no break-even point. Selling more only makes the loss bigger. Fix the price or the cost before anything else.
Break-even in sales value
Sometimes you know your costs as a percentage of sales rather than a cost per item. A café knows food costs are about a third of the till, for example. Then use the contribution margin: contribution as a share of the price.
- Contribution margin£15 ÷ £2560%
- Fixed costs£30,000
This version works even if you sell hundreds of different things, as long as the average variable cost stays about the same share of sales.
Adding the profit you want
Breaking even means the business pays its costs. It does not mean it pays you. To find the sales you need for a given profit, add the profit to fixed costs before you divide.
- Fixed costs£30,000
- Profit wanted before tax+£15,000
- Divide by contribution÷ £15
Sole traders: your pay is profit, not a cost
A sole trader’s drawings are not a business expense, so they are not in fixed costs. Add the income you need to live on as the profit target, and remember Income Tax and National Insurance come out of it. The sole trader tax calculator shows what you keep.
Margin of safety
The margin of safety is how far your expected sales are above break-even. It tells you how much room you have if a month goes badly.
- Sales above break-even2,500 − 2,000500
- As a share of expected sales500 ÷ 2,50020%
A 20% margin of safety means sales could fall by a fifth before the business makes a loss. A new business with a thin margin of safety, say under 10%, has little room for a slow start, a lost customer or a cost rise.
What moves your break-even point
Break-even is very sensitive to price, because a price rise goes straight into contribution. Here is what a 10% change does to the example business.
| Change | Contribution | Break-even sales | Break-even income |
|---|---|---|---|
| As now | £15.00 | 2,000 | £50,000 |
| Price up 10% to £27.50 | £17.50 | 1,715 | £47,143 |
| Price down 10% to £22.50 | £12.50 | 2,400 | £54,000 |
| Variable cost up 10% to £11 | £14.00 | 2,143 | £53,571 |
| Fixed costs up 10% to £33,000 | £15.00 | 2,200 | £55,000 |
A 10% price cut pushes break-even up by 20%, because it takes £2.50 out of a £15 contribution. That is why discounting is so risky for a business that is only just covering its costs, and why a modest price rise is often the fastest way to safety.
Three worked examples
A café
Fixed costs of £60,000 a year (rent, rates, two part-time staff, insurance, equipment lease). The average customer spends £8 before VAT, and food, drink and packaging cost £3.
- Contribution per customer£8 − £3£5
- Break-even customers a year£60,000 ÷ £512,000
- A weekAbout 231
- For £20,000 profit£80,000 ÷ £516,000 customers
A freelance consultant
Fixed costs of £12,000 (laptop, software, insurance, a co-working desk, accountant). A day rate of £400, with about £20 of travel and materials per day worked.
- Contribution per day£400 − £20£380
- Days to cover costs£12,000 ÷ £38032
- Days for £35,000 before tax£47,000 ÷ £380124
For service businesses the risk is less about break-even and more about billable days: holidays, illness, admin and finding the next client all eat into the year.
An online shop
Fixed costs of £30,000. Products sell for £25 before VAT and cost £10 including postage and marketplace fees. That is the example used throughout this guide: 2,000 orders a year, or about 39 a week.
Selling more than one thing
Most businesses sell several products at different margins. Use an average price and an average variable cost, weighted by how many of each you sell.
- Product A: 40% of sales£30 price, £12 cost£18 contribution
- Product B: 60% of sales£10 price, £4 cost£6 contribution
- Average price0.4 × £30 + 0.6 × £10£18.00
- Average variable cost0.4 × £12 + 0.6 × £4£7.20
- Break-even sales£45,000 ÷ £10.804,167
If the mix shifts towards the lower-contribution product, the break-even point rises even if total sales stay the same. Keep an eye on which lines are selling, not just how many.
The limits of break-even
- Costs are not perfectly fixed. Grow enough and you need bigger premises or another member of staff, so fixed costs step up.
- Prices are not perfectly fixed. Bulk discounts, sales and price rises all change the contribution.
- It ignores timing. You might break even over a year and still run out of cash in a quiet month, or while you wait for customers to pay. A cash-flow forecast covers that.
- It is before tax. Profit above break-even is taxed: Income Tax and National Insurance for a sole trader, Corporation Tax for a company.
Using break-even in a business plan
Lenders, including the government-backed Start Up Loans scheme, expect a business plan with a cash-flow forecast, and a break-even calculation is one of the clearest ways to show your numbers add up. A strong plan shows:
- your fixed costs, listed, with where each figure came from;
- your price and variable cost per sale, with supplier quotes if you have them;
- the break-even point per year, per month and per week, so it can be compared with real trading days;
- your expected sales and the margin of safety above break-even;
- what happens if sales are 20% lower than expected, or costs 10% higher.
Translate the answer into something you can check each week, such as customers through the door or orders shipped. “39 orders a week” is easier to manage than “£50,000 a year”.
When will I break even?
Break-even sales tell you how much you need to sell in a year. A new business also wants to know how long it will take to earn back what it spent getting started: equipment, fitting out premises, a website, opening stock. That is the payback period.
- Expected sales2,500 a year
- Profit at that level2,500 × £15 − £30,000£7,500 a year
- Profit a month£625
- Start-up costs to earn back£12,000
Sales rarely start at full speed. If the first six months bring in half the expected orders, the business makes a loss over that period and the payback stretches further. Build a month-by-month forecast that ramps up gradually, and keep enough cash to cover fixed costs while you get there.
Many lenders and investors ask for exactly this: when the business will start covering its costs each month, and when it will have earned back the money put in. Showing both, with the assumptions behind them, makes a plan much more convincing.
Cash break-even
The usual break-even sum uses costs as they appear in your accounts. Your bank balance can tell a different story. Loan repayments, stock bought ahead of a busy season and tax bills all take cash without being day-to-day costs.
- Fixed costs in the accounts£30,000
- Loan capital repaid£400 × 12+£4,800
- Cash going out each year£34,800
- Divide by contribution÷ £15
A business can be profitable on paper and still run short of cash. If you have borrowing or big seasonal swings, work out both figures and plan around the higher one. Remember too that a profitable sole trader will owe Income Tax and National Insurance on that profit, usually paid twice a year; see the payment on account calculator.