Break-Even Calculator

How the break-even calculation works

Every cost in a business is either fixed or variable. Fixed costs stay the same whether you sell nothing or sell a lot in a month: shop rent, salaries, the internet subscription, a loan repayment, the baseline cost of running the generator. Variable costs rise with each sale: ingredients, packaging, stock bought for resale, delivery per order, a commission per job.

Each sale first pays its own variable cost. What is left over is the contribution margin, and it goes towards the fixed costs. Once enough sales have contributed enough to cover all the fixed costs, you have broken even.

• Contribution margin per unit = selling price − variable cost per unit
• Contribution margin % = contribution margin ÷ selling price × 100
• Break-even units = fixed costs ÷ contribution margin per unit
• Break-even revenue = fixed costs ÷ contribution margin %
• Units for a target profit = (fixed costs + target profit) ÷ contribution margin per unit
• Margin of safety = (expected sales − break-even sales) ÷ expected sales × 100

If the result is not a whole number, the calculator rounds break-even units up, because you cannot sell a third of a loaf. Break-even revenue is shown exactly.

A worked example: a small bakery

A bakery in Ibadan pays ₦250,000 a month in rent, ₦600,000 in salaries, ₦150,000 for power and generator fuel, ₦30,000 for internet and data and ₦120,000 in loan repayments. Fixed costs come to ₦1,150,000 a month.

A loaf sells for ₦2,500. Flour, sugar, yeast, packaging and the gas used in baking come to ₦1,500 a loaf. Each loaf therefore contributes ₦1,000, a contribution margin of 40%.

Break-even is ₦1,150,000 ÷ ₦1,000 = 1,150 loaves, and ₦1,150,000 ÷ 40% = ₦2,875,000 of sales. If the bakery expects to sell 1,600 loaves, it has a margin of safety of 450 loaves: sales could fall by 28.1% before it starts losing money. To make ₦500,000 profit in a month it needs (₦1,150,000 + ₦500,000) ÷ ₦1,000 = 1,650 loaves. Load the example in the calculator and the chart shows the same crossing point.

Service businesses: price per job or per hour

The same arithmetic works when you sell time rather than goods. Switch the calculator to service mode and treat each job, or each billable hour, as the unit. Variable cost is whatever each job uses up: materials, transport to the client, a subcontractor or a commission.

A cleaning company with ₦800,000 of monthly fixed costs that charges ₦25,000 a job and spends ₦10,000 per job on supplies and transport contributes ₦15,000 a job, or 60%. It breaks even at 53.3 jobs, so 54 jobs a month, or ₦1,333,333 of revenue.

For freelancers and consultants, the bigger question is usually the rate itself. The freelance rate calculator works that out from a take-home target, costs, billable hours and income tax.

Common mistakes

• Including VAT in the price. If you are VAT-registered, the 7.5% you charge belongs to the Nigeria Revenue Service. Enter prices excluding VAT, or your break-even point will look lower than it is.
• Leaving the owner out of fixed costs. If you pay yourself, that pay is a fixed cost. A business that only breaks even before the owner is paid is not breaking even.
• Putting everything into fixed costs. Fuel for a delivery bike, card or transfer charges per sale, and packaging are variable. Misclassifying them makes the contribution margin look better than it is.
• Forgetting irregular costs. Annual licences, generator servicing, insurance and equipment replacement should be spread monthly and included.
• Using last year’s costs. When fuel, flour or data prices move, the break-even point moves with them. Recalculate when an input price changes by more than a few percent.
• Confusing break-even with cash flow. You can be above break-even and still short of cash if customers pay late or you have just bought a lot of stock.

Using the result

Break-even gives you a way to test decisions before you make them. A price rise increases the contribution per unit and pulls the break-even point down. A new hire adds to fixed costs and pushes it up: divide the monthly salary by your contribution per unit to see how many extra units that person has to help sell. A cheaper supplier lowers variable cost, and you can see what that does to the break-even point too.

The calculator is only as good as the figures you put in. Recording expenses by category as they happen, instead of reconstructing them at the end of the month, is what makes the fixed and variable split reliable. ereQa keeps expenses and invoices in one place, with monthly reports, so the costs and sales behind your break-even point come from your own records rather than estimates.