How to calculate break-even point

Key points

• A break-even point is when your revenue equals the total costs
• What is the break-even point formula?
• How to use a break-even point calculator

The goal of any business is to make a profit. And it’s these profits that will help business owners reinvest their business, establish a steady income and more. While this won’t happen from day dot, it’s important to understand when your business products or services are making that profit. So to figure this out, you have to calculate your break-even point.

What is a break-even point?

A break-even point is when your total revenue (the money your business makes) equals the total cost (the money you spend to make the product). Because you’re not making or losing any profits, it’s called a ‘break-even point’.

In the diagram below, the break-even point is when the lines that represent revenue and the total cost intersect in the middle. The space above this intersection is the profit, while the space below is the loss.

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Why is working out your break-even point so important?

Understanding your break-even point can help influence certain decisions you make within your business.

For example, if you’re relocating your business, then working out your break-even point can help you determine how much money you’ll need to make to cover the costs of the new location while making a profit.

Another example is lowering the price of a product for a competitive edge. Determining your break-even point is a great way to see how many more units of product you need to sell to mitigate the risk of profit loss.

Working out your break-even point can shape your business plan, such as working out price points and determining the cost of running your business.

What are the different parts of the break-even point formula?

Fixed costs

Your fixed costs or overheads are costs that you will have to pay regardless of how much product you sell. For example, your rent and the salary of permanent full-time workers fall under this category.

Variable cost

Variable costs are costs that increase in proportion to the number of sales you make (in dollars) or the units you sell. For instance, the cost of your sold products, commissions or bonuses, and the wages of temporary workers fall within this category.

Selling price

The selling price is how much you’re selling your product or service for.

The break-even formula

The break-even formula has three components:

• Fixed costs
• Variable costs
• Selling price

The break-even formula uses all three of these, so at its most simple it becomes:

Fixed costs ÷ (Unit selling price - Unit variable cost)

But to properly calculate your break-even point, you might also need to factor in when you want to achieve this by and how many sales you would need to have per week to get to that point. That’s where a break-even calculator can come in handy.

Using the ANZ break-even calculator

We’ve got an easy-to-use break-even point calculator to help you get your calculations just by inputting a few numbers.

Step 1

Enter how much money you want to make within a set number of weeks in the Desired financial return cell.

Step 2

Add in your Level of overheads. This then automatically adds up to generate the Gross margin your business requires – which is the money you have left after taking out the cost of making the product.

Step 3

Now we move onto the sales sections. This is where you input the Price of each unit you will sell, and the cost of Labour and Materials per unit. This will generate the Total cost of each unit and the Gross margin per unit.

Bonus step

You can also add the number of weeks you can work during the year in the Available time cell. This will help generate the number of sales you need to make each week in the required return section.

Speaking of which, the required return section will automatically generate the:

• Number of units you must sell to reach your target
• Total sales needed
• Number of sales per week to achieve this target.

Next steps

If you want to start calculating your break-even point, then download the Break-even calculation template (xlsx 1.5MB).