Quick answer: How do I work out my break-even point?
A break-even analysis finds the level of sales that pays every cost and leaves zero profit. Divide your costs into fixed (the same every month) and variable (arriving with each sale). Price minus variable cost is your contribution margin; fixed costs divided by that figure is the number of sales you need. To express it in dollars, divide fixed costs by the contribution margin percentage. Kantivo's income statement reports cost of goods sold apart from operating expenses, so both inputs come straight from your own books.
Ask a business owner how much they need to sell each month and you'll usually get a round number and a hopeful tone. That round number is doing a lot of work. It decides whether a quiet month feels like a blip or a crisis, whether a new hire is affordable, and whether a promotion is a good idea. It deserves better than a guess.
A break-even analysis turns the guess into a figure you can defend. It uses numbers already sitting in your books to show the precise volume of sales that covers every bill. Then — the part that makes it genuinely useful — it lets you test decisions before you make them.
Below we'll build one from scratch for a small grooming salon, then use it to answer three practical questions: how much to sell for a target profit, how much room there is before a loss, and what a price change, discount, or hire really costs.
The Idea Behind Break-Even Analysis
Every cost in a business falls into one of two groups. Fixed costs turn up every month regardless of how busy you are. Variable costs appear only when you make a sale, and rise in step with volume.
Each sale brings in its price, pays for its own variable costs, and hands whatever is left over to the fixed-cost pile. Once enough sales have chipped in to cover that pile completely, you've broken even. Every sale after that is profit.
What's the formula for the break-even point?
Break-even point (units) = Fixed costs ÷ Contribution margin per unit
where contribution margin per unit = price − variable cost per unit. For a dollar figure instead: break-even sales = fixed costs ÷ contribution margin %.
Building One: Sorting the Salon's Costs
Tidy Paws Grooming is a two-table dog-grooming salon. The average appointment brings in $75. Its groomers are paid partly by commission, which — as you'll see — matters a great deal.
| Monthly cost | Behaves as | Amount |
|---|---|---|
| Lease | Fixed | $4,200 |
| Front-desk manager (salaried) | Fixed | $5,600 |
| Groomers' base pay | Fixed | $2,400 |
| Insurance, booking software, utilities, bookkeeping | Fixed | $2,200 |
| Fixed costs | $14,400 | |
| Groomer commission | Variable | $15.00 per appointment |
| Shampoo, blades, supplies | Variable | $3.75 per appointment |
| Card fees | Variable | $2.25 per appointment |
| Variable cost | $21.00 per appointment |
How do I handle a cost that's both fixed and variable?
Break it in two. Tidy Paws' groomers get a base wage plus commission, so the base goes in fixed and the commission goes in variable. A water bill with a standing charge works the same way. Precision to the penny isn't the goal — a sensible split is enough to make the answer reliable.
Contribution Margin: What Each Sale Leaves Behind
Each $75 appointment costs $21 in variable costs, so it contributes $54 toward the fixed bills. As a percentage, $54 ÷ $75 = 72%. That's the contribution margin ratio: 72 cents of every sales dollar is available to pay the lease, the salaries, and eventually the owner.
It's worth noticing how this differs from gross margin on an income statement. Gross margin only deducts cost of goods sold. Contribution margin deducts everything that scales with sales — commissions and card fees included — which is why it's the right figure for break-even. For the pricing side of the story, see markup vs margin.
The Break-Even Point for Tidy Paws
$14,400 ÷ $54 = 266.7, so Tidy Paws needs 267 appointments a month to break even. In dollars: $14,400 ÷ 0.72 = $20,000. Spread across an average month, that's about 62 appointments a week.
Should I use units or dollars?
Use units when you have one main thing you sell — appointments, billable hours, jobs, covers. It gives staff a target they can picture ("62 dogs this week"). Use dollars when you sell a wide mix of items at different prices; you just need your overall variable cost as a percentage of sales, which a year of income statements will give you.
Putting the Number to Work
How many sales do I need to hit a profit goal?
Treat the profit you want as one more fixed cost. For $5,000 a month of profit: ($14,400 + $5,000) ÷ $54 = 360 appointments, or $19,400 ÷ 0.72 = $26,944 in revenue. Today's $24,000 is 320 appointments, so "grow the business" now has a specific shape: 40 more appointments a month, or about nine a week.
How much can sales drop before I lose money?
That's the margin of safety. Tidy Paws books $24,000 a month; subtract the $20,000 break-even and there's $4,000 of room, or 16.7%. A quiet stretch that cuts revenue by more than a sixth tips the month into a loss. Knowing that in advance is what a 13-week cash flow forecast is for — making sure the bank balance can absorb it.
What does a change in price, discounts, or staffing do?
| What changes | Contribution per appointment | Appointments to break even | Difference |
|---|---|---|---|
| Nothing (today) | $54.00 | 267 | — |
| Raise the average price $5 to $80 | $59.00 | 245 | 22 fewer |
| 10% off every appointment ($67.50) | $46.50 | 310 | 43 more (+16%) |
| Hire a salaried bather at $3,600 a month | $54.00 | 334 | 67 more |
Two lessons fall out of that table. First, a 10% discount raises the break-even point by 16%, not 10%, because the full cut comes out of contribution while commission and supplies stay put. Second, the new hire needs 67 extra appointments a month to pay for themselves — if the bather frees groomers to take roughly 16 more dogs a week, it works; if not, it doesn't. That's a far better conversation to have before the job ad goes up than after.
In Kantivo: pull an income statement for the last twelve months. Cost of goods sold sits on its own line, apart from operating expenses, so the biggest variable costs are already separated out — move items like commissions and card fees across, treat the rest as fixed, and divide by twelve. Job costing shows contribution job by job for service work, and the Budget vs Actual report tells you each month whether you landed above or below plan.
Where Break-Even Analyses Go Wrong
- Assuming only cost of goods sold is variable. Commission, card fees, shipping and per-job contractors all move with volume. Filing them under fixed makes the break-even point look easier than it is.
- Leaving yourself out. If you pay yourself through owner's draws rather than salary, add a realistic draw to fixed costs — otherwise you've calculated when the business survives, not when you do.
- Ignoring loan principal. It never appears on the income statement, but it leaves the bank account every month. For a cash break-even, include the whole repayment.
- Working from messy books. If expenses are coded inconsistently, the fixed/variable split is fiction. Clean up your categories and reconcile first.
- Calculating it once and filing it away. Every lease renewal, hire, and price change moves the line.
Test the Decision Before You Make It
Kantivo is GAAP-compliant double-entry accounting that lives on your own machine. Its income statement separates cost of goods sold from operating expenses, job costing shows profit on each job, and Budget vs Actual measures every month against your plan — the raw material for an honest break-even point. One flat annual price, no monthly fees.
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A break-even analysis is a single division — fixed costs over contribution margin — resting on an honest split of your costs. Its value is in the questions it answers: how much you must sell to reach a profit goal, how far sales can slide before the month turns red, and what a price rise, a discount, or a new hire does to the target.
Want to see how sales, variable costs, and fixed expenses flow through a set of books? Our free interactive double-entry accounting course lets you post transactions in a sandbox and watch them land on the financial statements, at your own pace.
Frequently Asked Questions
What does a break-even analysis tell you?
It tells you the amount of business — in sales dollars, units, jobs, or appointments — that exactly pays for all of your costs, leaving a profit of zero. Anything short of that point is a loss and anything beyond it is profit. You find it by dividing your fixed costs by the contribution each sale makes after its own variable costs.
How do you calculate the break-even point?
Subtract the variable cost of one sale from its price to get the contribution margin, then divide your fixed costs by that figure to get break-even in units. For break-even in dollars, divide fixed costs by the contribution margin as a percentage of price. With $14,400 of monthly fixed costs and a 72% contribution margin, break-even sales are $20,000 a month.
Which costs count as fixed and which as variable?
A fixed cost is one you pay at the same level whether it's a busy month or a quiet one: rent, salaries, insurance, equipment leases, subscriptions. A variable cost only arises when a sale happens and grows with volume: supplies, materials, card fees, commissions, and per-job contractors. Costs that contain both, like a phone plan with overage charges, should be split between the two groups.
What does margin of safety mean in break-even analysis?
It is the distance between what you currently sell and your break-even point. A business with $24,000 of monthly sales and a $20,000 break-even has a $4,000 margin of safety — about 17% of sales. That percentage is how far revenue could drop before the business stops making money.
Why does a discount push the break-even point up so much?
Because the variable cost of the sale doesn't shrink when the price does, every dollar of discount is taken straight out of contribution margin. A $75 service with $21 of variable cost contributes $54; at 10% off it contributes only $46.50, so the business needs roughly 16% more sales just to cover the same fixed costs.
When should I recalculate my break-even point?
Any time a fixed cost moves — a new hire on salary, a lease renewal, a loan — and any time your prices or supplier costs change. Beyond that, a quarterly refresh using your latest closed income statement keeps the figure honest.
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