How many widgets do you need to sell to start making money? Break-even analysis answers that. Get the math wrong and you may run out of cash before profitability. Get it right and you can plan around the milestone.
The basic formula
Break-even units = fixed costs ÷ (price − variable cost per unit).
The denominator is "contribution margin" — how much each unit contributes to covering fixed costs after variable costs are paid.
Worked example: T-shirt business
Fixed costs (monthly):
- Rent: $2,000
- Salary: $5,000
- Software subscriptions: $200
- Insurance: $300
- Total fixed: $7,500
Variable costs per shirt:
- Blank shirt: $5
- Printing: $3
- Shipping: $2
- Total variable: $10
Selling price: $30.
Contribution per shirt: $30 − $10 = $20.
Break-even = $7,500 / $20 = 375 shirts/month.
Above 375 shirts, you're profitable. Below, you're losing money.
Service business example
Consultant. Fixed costs $4,000/month. Hourly rate $150. No real "variable cost" beyond opportunity cost.
Break-even hours = 4000 / 150 = 27 hours/month.
Above 27 billable hours per month, you're profitable. Below, in red.
Subscription business
SaaS company. $50k/month fixed costs. Each customer pays $50/month. Variable cost per customer ~$5 (hosting, support).
Contribution: $45/customer.
Break-even customers = 50,000 / 45 = 1,112 customers.
Recurring revenue model — once you're above break-even, every additional customer is profit.
Why fixed and variable matter
Two businesses can have the same total costs but different break-even points:
Business A: $10k fixed, $5 variable per unit. Sells at $25.
- Contribution: $20/unit. Break-even: 500 units.
Business B: $5k fixed, $15 variable per unit. Same $25 selling price.
- Contribution: $10/unit. Break-even: 500 units.
Same break-even unit count, but very different risk profiles. Business A has more downside (high fixed costs) but more upside (each unit contributes $20). Business B is more flexible.
Tech companies often have high fixed costs (engineering, infrastructure) but low variable costs — high operating leverage. Once they cross break-even, profits scale fast.
Beyond break-even: target profit
To target a specific profit (not just break-even):
Required units = (fixed costs + target profit) / contribution.
If you want $10k/month profit on top of break-even:
- Required units = (7500 + 10000) / 20 = 875 shirts.
Sensitivity analysis
How does break-even change if assumptions change?
- Price drops 10%: selling at $27 instead of $30 → contribution $17 → break-even 441 shirts. 17% higher.
- Variable cost rises 20%: $12/shirt instead of $10 → contribution $18 → 417 shirts. 11% higher.
- Fixed cost rises 20%: $9000 instead of $7500 → 450 shirts. 20% higher.
Break-even is most sensitive to price changes (small price changes have big effects).
Multi-product break-even
Selling multiple products at different prices and contribution margins? Use the weighted average:
- Calculate contribution margin for each product.
- Estimate sales mix (e.g., 70% product A, 30% product B).
- Weighted contribution = 0.70 × A + 0.30 × B.
- Break-even = fixed costs / weighted contribution.
Time component
Break-even can be calculated as:
- Per month / per quarter / per year.
- Total units to cover startup costs.
For new businesses with high startup costs, calculate "lifetime break-even" — how long until cumulative profit covers cumulative loss?
Example: $100k startup investment, $5k/month profit after launch. Cumulative break-even: 20 months.
The "hockey stick" startup pattern
Many startups operate at a loss for years before reaching break-even. Common pattern:
- Year 1: −$200k (heavy investment, few customers).
- Year 2: −$100k (still losing but improving).
- Year 3: $0 (break-even).
- Year 4: $200k (profitable, scaling).
- Year 5: $1M (significant profit).
This requires patient capital. Investors look for the timing and slope of the path to break-even.
Cash flow vs accounting break-even
Accounting break-even uses standard P&L items (depreciation, accruals).
Cash flow break-even uses actual cash in/out — useful for survival analysis.
A business can be "accounting profitable" but cash-flow negative (investing in inventory, slow-paying customers). Always know both.
What to do at break-even
Reaching break-even is critical milestone:
- Confirm the math is real (not luck or one-time).
- Document the operating model.
- Plan growth investments now justified.
- Build cash reserves for downturns.
Many businesses fail in the "after break-even" phase by overinvesting and dropping back below.
Calculate your break-even
Our break-even calculator handles units, revenue, and contribution margin from your fixed costs and per-unit economics. Useful for planning launches, pricing changes, or scenario analysis.