Break-Even Analysis Basics

Ask a business owner how much they need to sell each month just to cover their costs, and the honest answer is often a shrug — busy months feel safe, quiet ones feel frightening, and the actual line between the two is a mystery. Break-even analysis draws that line. It is one of the simplest calculations in business finance and one of the most clarifying, because once you know the number, every pricing and spending decision has a fixed point to push against.

Two ingredients: fixed costs and contribution margin

Break-even needs only two inputs. Fixed costs are the bills that arrive regardless of sales — rent, insurance, software, base wages, loan repayments, and your own pay if the business is meant to support you. Contribution margin is what each sale leaves behind after its own direct costs — materials, subcontractors, card fees — expressed as a proportion of the sale. If a job sells for S and its direct costs are V, the contribution margin ratio is (S minus V) divided by S. Break-even sales are then simply fixed costs divided by that ratio: the level of sales at which contributions exactly cover the fixed bills, and profit is zero. Your profit and loss in Xero or MYOB already holds everything the calculation needs, once the costs are honestly sorted into the two buckets.

Price is the lever most owners underuse

Because fixed costs do not move with sales, small changes at the top have outsized effects at the bottom — but the two ways of growing are not equal. Selling more brings each sale's variable costs along with it, so only the contribution portion lands. A price rise, by contrast, flows straight into contribution on every sale you were already making, with no extra materials, hours or wear — so a modest increase can lower the break-even point more than a substantial push for volume, provided customers stay. Discounting works the same way in reverse: a small discount can quietly demand a startling amount of extra volume just to stand still. Running your own numbers both ways before a pricing decision is exactly what this analysis is for.

What we commonly see go wrong

• Treating wages as entirely variable when most of the roster is really fixed, which flatters the margin and understates break-even.
• Leaving the owner's own pay out of fixed costs, so the business "breaks even" while the owner earns nothing.
• Using last year's rent and insurance in this year's calculation after both have moved.
• Calculating it once and never revisiting after a price change, a hire or a new lease — the number moves more often than owners expect.
• Discounting to win work without checking how much extra volume the discount silently requires.

A worked example

As an illustration: say a mobile mechanic has fixed costs of $8,000 a month, and each $100 of sales keeps $40 after parts and consumables — a 40% contribution margin. Break-even is $8,000 divided by 0.40, which is $20,000 of sales a month. Now compare two moves: chasing 10% more jobs, or raising prices by 5%. The extra jobs add contribution but bring their own parts and hours with them; the price rise adds contribution on every existing job with no extra hours at all, and lowers the break-even point immediately. Which move is right depends on what customers will bear — but the arithmetic makes the comparison honest. These figures are illustrative only; run the calculation with your own numbers from your own file.

When to get help

If your costs do not split cleanly into fixed and variable, if the business sells several products with very different margins, or if the break-even number the spreadsheet produces feels a long way from what the bank account says, it is worth working through it once with your accountant. The calculation itself is simple; getting your own cost structure honestly classified is where the value sits, and it only has to be done properly once before the number becomes something you can maintain yourself.

What counts as a fixed cost?

Anything you must pay regardless of sales in the period — rent, insurance, software subscriptions, base salaries, loan repayments and, realistically, your own pay. Some costs are mixed, like a vehicle with both lease and fuel components; split them roughly and consistently rather than agonising.

Is breaking even the same as being okay?

No. Break-even is the point of zero profit, and it ignores timing — you can trade above break-even and still run short of cash if customers pay slowly. It works best alongside a cash flow forecast, not instead of one.

How often should I recalculate my break-even point?

Whenever a major input changes — a rent review, a hire, a price change, a new lease — and at least annually alongside the budget. A break-even number calculated years ago describes a business that no longer exists.