What is the break-even point?

The calculation depends on sorting costs by how they behave. Take the variable cost of one unit from its selling price to find its contribution, the amount each sale adds towards fixed costs. Divide the period's total fixed costs by that contribution to find how many units must be sold to break even. A business selling many different items can instead divide its fixed costs by its average contribution as a share of sales, which gives the value of sales needed. These calculations need a positive contribution: zero or negative contribution cannot cover positive fixed costs. If units can only be sold whole, round the required number up to the next whole unit.

The result rests on estimates. It assumes prices, costs per unit and the mix of products sold stay as expected, and that fixed costs hold steady across the range of sales being considered. Figures taken from up-to-date books make the estimate far more realistic than figures from memory.

Break-even is a planning tool rather than a goal. It shows the effect of a decision before it is made: a higher rent or an extra salaried employee raises fixed costs and with them the sales needed to break even, while a price rise lifts the contribution from each sale and so lowers the number of sales needed. It says nothing about cash, which can still run short at break-even if customers pay slowly or loan repayments fall due.