How to Calculate Break-Even for a Small Business

Break-even is the sales level where your revenue covers the fixed and variable costs included in your model. At that point, operating profit is zero: you are covering those costs, but you are not yet earning a profit from them.

For a simple product or service, start with these formulas:

Contribution margin per unit = Selling price per unit − Variable cost per unit

Break-even units = Fixed costs ÷ Contribution margin per unit

If you want the answer in money rather than units:

Contribution-margin ratio = Contribution margin per unit ÷ Selling price per unit

Break-even revenue = Fixed costs ÷ Contribution-margin ratio

Those calculations are useful. But they answer only one question: how much do I need to sell to cover the costs in this model?

They do not answer another question that matters just as much to a founder: will I have enough cash at the right time to keep operating?

That is why break-even belongs inside a forecast, not on its own.

1. Start by separating fixed and variable costs

The formula works only if the inputs make sense.

Fixed costs are costs that do not change directly with each extra unit you sell over the period you are modeling. Examples can include rent, a baseline level of salaries, insurance and software subscriptions.

Variable costs rise as sales or production rise. Depending on the business, that might include materials, packaging, delivery, transaction fees, subcontractor time or another cost that is directly tied to each sale.

Some costs are mixed. A utility bill, for example, may have a minimum monthly charge plus a usage element. Where practical, separate the fixed and variable parts rather than forcing the whole cost into one bucket.

The period matters too. If you are calculating monthly break-even, use monthly fixed costs and per-unit economics that belong to the same period.

If your selling price is still moving, first work through how price relates to cost and customer value. BznsBuilder’s guide to pricing products and services is a useful companion to this calculation.

2. Calculate contribution margin

Contribution margin tells you how much of each sale is left after the variable cost of delivering that sale.

Imagine a small B2B service company. Each completed project sells for EGP 50,000 and has EGP 20,000 of delivery costs that vary with each project.

Illustrative example:

• Selling price per project: EGP 50,000
• Variable cost per project: EGP 20,000
• Contribution margin per project: EGP 30,000

So:

EGP 50,000 − EGP 20,000 = EGP 30,000 contribution margin per project

The contribution-margin ratio is:

EGP 30,000 ÷ EGP 50,000 = 60%

That 60% is the share of each sales pound that remains to cover fixed costs and, after those fixed costs are covered, profit.

3. Calculate break-even units and break-even revenue

Now assume the same business has EGP 180,000 of fixed operating costs per month.

Break-even units are:

EGP 180,000 ÷ EGP 30,000 = 6 projects per month

Break-even revenue is:

EGP 180,000 ÷ 60% = EGP 300,000 per month

The two answers tell the same story from different angles. Six projects at EGP 50,000 each produce EGP 300,000 of revenue.

At that level:

• revenue = EGP 300,000;
• variable costs = 6 × EGP 20,000 = EGP 120,000;
• contribution margin = EGP 180,000;
• fixed costs = EGP 180,000;
• modeled operating profit = EGP 0.

If your “unit” must be a whole item, order, project or customer, round the theoretical unit result up, not down. A formula that says 6.2 projects does not mean six projects are enough.

4. What break-even actually tells you

Break-even is a threshold, not a verdict on the whole business.

Under your assumptions:

• below break-even: contribution margin is not enough to cover the fixed costs in the model;
• at break-even: those modeled costs are covered and operating profit is zero;
• above break-even: each additional unit contributes toward operating profit, assuming the price and cost structure hold.

That is valuable for pricing, capacity planning and sales targets. It is also useful when you are considering a new hire, location, product line or other cost that changes the fixed-cost base.

But break-even is still an accounting economics question. It does not automatically tell you how much cash is sitting in the bank.

5. Why you can break even and still run short of cash

Suppose our illustrative service company completes six projects in a month. On the operating model, that is exactly break-even.

Now add one cash-timing assumption: customers pay 30% in the month the work is completed and 70% the following month.

For the six projects:

• revenue completed: EGP 300,000;
• current-month cash collected: 30% × EGP 300,000 = EGP 90,000;
• variable + fixed operating costs paid in the month: EGP 120,000 + EGP 180,000 = EGP 300,000.

Before considering opening cash, older receivables, supplier credit, financing or other cash movements, that month has a EGP 210,000 timing shortfall.

The business can therefore be at break-even in the profit model and still need cash to bridge the gap between doing the work, paying the bills and collecting the invoice.

This is the same reason a profitable business can feel cash-poor when receivables grow, inventory is bought before it is sold, or major payments fall due before customer cash arrives. If that distinction is the problem you are seeing, read Sales Are Up. So Why Is Cash Going Down?.

A real cash forecast should include the full picture: opening cash, existing receivables and payables, taxes, capital spending, loan movements and any other relevant cash flows. The EGP 210,000 figure above is deliberately simplified to show the timing effect; it is not a complete company cash forecast.

6. Break-even changes when the business drivers change

Your break-even point is not fixed forever. Change price, direct cost or fixed cost and the answer moves.

Here is what happens to the same illustrative business:

This is where break-even becomes a decision tool rather than a one-time calculation.

If you discount your price to win work, how many more projects must you deliver? If supplier or subcontractor costs rise, how much does the sales threshold move? If you add another EGP 60,000 of fixed monthly cost, what sales volume now covers it?

Those are business-driver questions. A strong model lets you change the assumptions and see what happens rather than treating one break-even number as permanent.

7. Put break-even inside a forecast

A break-even calculation is a snapshot. A forecast adds time.

That matters because founders rarely move from “below break-even” to “comfortably above break-even” in one clean jump. Sales ramp up. Prices change. Costs step up. Customers pay late. Equipment or deposits may be paid before the extra revenue arrives.

Once you know your break-even point, build it into a month-by-month forecast:

1. Forecast the number of units, projects or customers you realistically expect each month.
2. Apply the selling price and variable cost assumptions.
3. Add the fixed costs that start in each month.
4. Model when customers actually pay and when supplier, payroll and other payments leave the bank.
5. Watch both profit and the closing cash balance.
6. Run a downside case with lower sales, lower price, higher cost or slower collections.

If you do not yet have a forward-looking model, start with BznsBuilder’s guide to building your first financial forecast.

8. A founder’s break-even checklist

Before you use the result to make a decision, check all ten items:

1. Period: Are the fixed costs monthly, quarterly or annual?
2. Fixed costs: Have you included the costs that remain even if sales are zero?
3. Unit: Is your unit meaningful — product, order, project, hour or customer?
4. Price: Is the selling price realistic after discounts?
5. Variable cost: Does it include the costs that genuinely rise with each unit?
6. Contribution margin: Have you calculated both the per-unit amount and the ratio?
7. Break-even: Have you calculated units and revenue?
8. Whole units: If units are discrete, have you rounded up?
9. Scenarios: Have you tested what happens when price, volume or cost changes?
10. Cash: Have you forecast the timing of collections and payments and checked the lowest cash balance?

If you cannot answer number 10, you know the profit threshold but you do not yet know whether the path to that threshold is affordable.

9. Model the assumptions in BznsBuilder

BznsBuilder is AI business planning and financial forecasting software for SMEs.

You can build a financial forecast around your revenue, direct costs, personnel, expenses and other business drivers, then use what-if scenarios to test different assumptions. That lets you look beyond a single break-even number and see how a change affects the wider forecast, including profit and cash flow.

There is no need to treat break-even as a special feature to get value from the calculation. Work out the economics, put the assumptions into the forecast, then test the decisions that could move them.

Learn more about financial forecasts and scenarios.

Build your forecast and see how your decisions affect cash. Start your 7-day free trial.

The decision is bigger than the formula

Break-even answers a precise question: what level of sales covers the operating costs in this model?

A cash-flow forecast answers a different one: can the business fund the timing of those sales and costs without running short of cash?

A founder making a real decision needs both.