What is a Break-Even Point?
The level of sales where you stop losing money and start making it — revenue exactly equals costs.
Your break-even point is where total revenue equals total costs. Below it you're subsidizing your own customers; above it you're running a business. The formula is fixed costs ÷ (price − variable cost per unit) — that is, fixed costs divided by the contribution margin of one unit.
A worked example: $4,000/month of overhead, a product that sells for $50 and costs $20 to make. Contribution margin is $30. Break-even is 4,000 ÷ 30 = 134 units a month. Sell 133 and you lost money this month, whatever the revenue looked like.
It's worth knowing this number to the unit, because it converts a vague anxiety into a target. 134 is something you can plan against; 'are we doing okay?' is not. Hit it and you've stopped digging — which is the first real goal of any new venture.
Related terms
Definitions from the Business Dog Glossary — educational, occasionally satirical, never financial advice.