Break-Even Analysis Simplified

Joshua Botello

If you are looking to start up your small business, then you may want to know if your idea is going to work and when the business will be successful. One of the ways you test the feasibility of your business idea is to do a break-even analysis. In this article, I'll explain what break-even actually is, its components, and how to calculate it with a nifty template in the article. 

What is Break-Even?

The break-even analysis is a financial tool used to determine when a business will be able to cover all its expenses and start making a profit. It identifies the point at which total revenue equals total costs, resulting in neither profit nor loss. This analysis is crucial for setting sales targets, pricing strategies, and managing costs effectively.

Break-even Formula

Financial formulas and simple analyses like break-even can get confusing for people who may not like math or know anything about finance. Luckily, this formula is easy enough to help you determine the number of units that need to be sold to cover all costs.

Break-Even Quantity = Fixed Costs / (Selling Price per Unit − Variable Cost per Unit)

Don't worry too much about where you will get this information just yet. I'll show all the components and even show you a little calculator so you can plug in your own numbers to see if you can make money. 

Paying Yourself (how much) last

One of the other things you need to have a firm grasp on are your personal expenses as a business owner. This amount influences how much you need to pay yourself to maintain your lifestyle. A personal financial requirement should be considered when determining the overall financial goals of the business. Knowing the minimum amount needed for your personal expenses can help set realistic targets for the business's break-even analysis and ensure that you as the owner can sustain yourself while the business grows.

Components of Break-Even

The break-even formula is easy enough to understand, but I did say I would explain where you get this information and what goes into this calculation to help evaluate your business idea or current venture.

Fixed Costs

The first component is what is called a fixed cost. Fixed cost is an expense that does not change with the level of production or sales, such as rent, salaries, and insurance. They remain constant throughout the year regardless of the business's output and are predictable. 

Variable Costs

The opposite of fixed costs are variable costs. Like the name suggests, these costs fluctuate with the amount of product you make. They include expenses such as raw materials, packaging, and direct labor costs. 


Let's say it costs a bakery $15 to make a cake—$5 for raw materials such as sugar, milk, and flour, and $10 for the direct labor involved in making one cake. The table below shows how the variable costs change as the number of cakes baked varies.

The more cakes they make, the more the variable costs increase. When the bakery does not bake any cake, its variable cost is zero.

Selling price

The final component is the selling price or amount for which a product is sold. The amount of proceeds a company collects after using sale proceeds to cover variable costs is Gross Profit and leads to the calculation of what is called contribution margin.

Sales - Variable Costs = Gross profit

Contribution Margin = Gross Profit / Sales


Every dollar of contribution margin goes directly to paying for fixed costs; once all fixed costs have been paid for, every dollar of contribution margin contributes to Net profit.

The idea behind all of the components is the simple sales formula: Sales - Costs = Net Profit. With break-even, Net is always zero. When there is leftover money, you will use it to pay yourself, buy equipment, invest in the business, and more. Net Profit is what you have to work with to pay yourself last or reinvest.

Calculating Break Even

Let me show how to calculate Break-even. So let's go back to baking cakes. You have a bakery that sells baked cakes for $35 with variable costs of $15. $5 for ingredients we need to pay for to make the cake and $10 for direct labor to make the cake. Your fixed costs are $900 ($600 for rent, $200 for utilities, and $100 for insurance).


Let me introduce you to my break-even tool. So for the month of September of 2024, we plan to sell cakes for the scenario I just laid out. What does the calculator tell us? Accounting for all the costs, we need 45 cakes to cover all of our costs at a dollar amount of $1,575. Again, this is break-even before you are able to even pay yourself. How do we account for the owner's pay? 

Once you figure out your personal expenses to live, we factor that in the payroll section to pay yourself or even additional employees if you have them. Let's say we need to cover our expenses of $2,000; once we plug that in, our break-even jumps to 145 cakes. 

This means to pay yourself the minimum you need to make, you need to bake and sell 145 cakes per month. So, what about extra profit to reinvest into the business or hire? Well, that's easy…Sell more than 145 cakes. 

This tool isn't the be-all and end-all. You will want to look at your business bank accounts and other financials like balance sheet or Cash flow to see if you have some money in the bank to increase capacity or hire and then add that cost to another as a loan payment or increase payroll for another person.

Get Started Planning Your Business

Final Thoughts

A break-even analysis is a powerful way to plan out how, what, and how your business needs to perform to meet your costs. The best way to use this tool is in conjunction with your existing financial system, and you can do some stress and scenario tests. If the number seems too lofty, then you may not be ready to expand.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
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