PEAK RESOURCES · A PRACTICAL GUIDE
Break-even analysis for small businesses
Find the sales level that covers your costs—and see which assumptions move that number.
Start with contribution margin
Break-even is the point where revenue equals the costs included in your model. For a simple single-product business, separate fixed costs from the variable cost of each sale. The SBA’s break-even guidance uses the following relationship:
Price minus variable cost is the contribution per unit: the amount available to cover fixed costs and then profit. Use costs and sales from the same period.
A worked example
| Monthly assumption | Illustrative amount |
|---|---|
| Fixed costs | $12,000 |
| Selling price per unit | $100 |
| Variable cost per unit | $40 |
| Contribution per unit | $60 |
| Break-even volume | 200 units |
| Break-even revenue | $20,000 |
Here, $12,000 ÷ $60 = 200 units. At that volume, revenue is $20,000 and variable costs are $8,000, leaving $12,000 to cover fixed costs. These are invented teaching figures, not a Peak client result or an industry benchmark.
Change one assumption at a time
| Scenario | Contribution per unit | Break-even units, rounded up |
|---|---|---|
| Original: $100 price, $40 variable cost | $60 | 200 |
| Price falls to $90; cost stays $40 | $50 | 240 |
| Variable cost rises to $50; price stays $100 | $50 | 240 |
| Fixed costs rise to $15,000; contribution stays $60 | $60 | 250 |
A discount can require substantially more volume before you cover costs. Compare the required volume with your actual capacity, staffing and demand. Higher volume may also trigger additional fixed or step costs, such as a new shift.
What the simple formula leaves out
If you sell multiple products, a unit is not always comparable. Use an explicit sales mix and a weighted contribution margin, or model each product separately. For sales dollars, divide fixed costs by the contribution margin ratio.
When contribution is zero or negative, selling more units does not cover fixed costs under those assumptions. Revisit price, costs or the offer before using the break-even formula.
Profit break-even is not cash break-even. Debt principal payments, equipment purchases, customer payment delays and inventory purchases can create cash needs that are not captured by a simple profit model.
Pair this analysis with a cash-flow forecast. A business can cover its modeled costs over a month and still face a cash shortfall before customer receipts arrive.
Turn the calculation into a decision
Record the source of each assumption and compare the model with actual results. For a new location, test lower sales, a slower opening and higher operating costs. Decide which results would cause you to change the plan before committing to the expansion.
Peak’s strategic CFO advisory includes break-even analysis and new-unit modeling. A defined financial modeling project can also help you examine a specific decision.
Further reading
SBA: Business planning and break-even analysis
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