How to calculate your break even point: formula, worked example and how to lower it
The break even point is fixed costs divided by the contribution margin rate. With €600,000 of fixed costs and a 60% contribution margin, you need €1M of revenue before the business stops losing money. The threshold shifts with every hire, price cut and financed investment, so it has to be recalculated whenever the cost structure changes.
Few numbers deserve to be known by heart; the break even point is one of them. It is the level of revenue at which the business covers all of its costs: one euro below it you lose money, one euro above it you make money. For the owner of an SME or startup, this number changes the nature of decisions. Hiring, cutting a price, accepting a large but thinly margined contract: everything reads differently once you know where break even sits. The calculation fits on one line, but the value lies in sorting the costs correctly first.
The formula, in one line
Break even revenue = fixed costs divided by the contribution margin rate. Contribution is revenue less variable costs; its rate divides that amount by revenue. With €600,000 of fixed costs and a 60% rate, the threshold is €600,000 divided by 0.60, or €1M. Direct costs are not necessarily variable: the cost of staff assigned to a project may remain fixed in the short term. The formula assumes a positive rate and a cost structure and sales mix consistent with the planned volume.
Fixed versus variable: the split that decides everything
The test is simple: a cost is variable if it disappears when the sale disappears. Everything else is fixed, at least over the horizon of a fiscal year. On paper, nothing could be more obvious. In practice, almost every calculation I get to review goes wrong right here, and usually on just three or four line items.
- Variable: purchases of goods and materials, external contractors billed per project, sales commissions, shipping costs, payment fees. They track revenue almost mechanically.
- Fixed: rent, salaries and social charges of the permanent team, software subscriptions, insurance, accounting fees, depreciation. They land every month whether you sell or not.
- The ambiguous cases: the payroll of a production team is fixed over a quarter but variable over two years; workshop energy has a fixed base and a volume driven part. Decide based on the horizon of your decision, and stay consistent from one month to the next.
When in doubt, classify the cost as fixed. A slightly pessimistic break even protects you; an optimistic one puts you to sleep.
A worked example
Take a services company at €1.2M of revenue. Its variable costs (external contractors, commissions, direct project expenses) represent 40% of sales, so the contribution margin rate is 60%. Its annual fixed costs come to €600,000. Break even point: €600,000 divided by 0.60, which is €1M of revenue. At €1.2M, the company has a margin of safety of €200,000, roughly 17% of revenue. Put differently, it can lose one client in six before slipping back into a loss.
You can also express the threshold as a date: €1M divided by €1.2M, times 365, gives about 304 days. The company reaches break even in early November; everything it invoices after that builds the year’s profit. A date often speaks to teams better than an abstract amount, and it makes years comparable: a break even date moving up from November to September tells the story of a genuinely improved model. In monthly reviews, the date is the version I present first.
Why the threshold moves every time you hire or invest
The break even point is a snapshot, not a constant. Back to our services company: suppose it hires a salesperson with a fully loaded annual cost of €60,000. Fixed costs rise to €660,000 and the threshold climbs to €1.1M. The hire must therefore generate at least €100,000 of additional revenue just for the company to stand still. I have rarely seen that question asked in those terms before the contract is signed. It is the only one that matters.
- A hire or an additional lease raises fixed costs: the threshold rises by the added amount divided by the margin rate. At a 60% margin, €60,000 of extra fixed costs demand €100,000 of extra sales.
- A 5% price cut does not raise the threshold by 5%: it cuts into the margin rate, and the effect is amplified. In our example, moving from a 60% to a 55% margin pushes the threshold from €1M to roughly €1.09M, without spending a single extra euro.
- An investment financed with debt adds depreciation and interest: the accounting threshold rises, and the cash threshold rises even more, because loan repayments drain cash without showing up in the profit and loss statement.
How to lower your break even point
- Review your margins, focusing here on the contribution margin rate: price reviews, renegotiated purchasing, dropping offers that are structurally underpriced. It is the most powerful lever, because it works on the denominator of the formula.
- Make some costs variable: external contractors rather than a hire while the need is still uncertain, a variable component in sales compensation, capacity rented rather than bought. Peak profit drops a little, but the business withstands a downturn far better.
- Cut the fixed costs that produce nothing: dormant subscriptions, unused space, redundant tools. Rarely spectacular, but at a 60% margin every euro of fixed cost saved lowers the threshold by €1.67 of revenue.
The classic mistakes
- Forgetting your own compensation: a threshold calculated without the owner’s salary is fiction. Include a market level salary even if you are not paying yourself the full amount yet.
- Confusing the accounting threshold with the cash threshold: depreciation is a cost with no cash out, loan repayments are cash out with no cost. To steer the bank account, swap the former for the latter in the calculation.
- Calculating the threshold once and for all: it moves with every hire, every rent increase, every shift in the mix. Recalculating at each budget, and before every structural decision, is enough.
- Using an average margin rate when activities differ widely: if your product or service lines show margin rates more than 10 points apart, compute one threshold per activity, otherwise the blended number guides no decision at all.
The break even point is no classroom exercise: it is a monthly steering instrument, and one of the most profitable ones there is. An SME or startup that knows its break even, in euros and as a date, makes hiring and investment decisions a step ahead. I have seen owners discover theirs in the annual accounts, eight months too late, after a full year spent below the threshold without knowing it. If your bookkeeping does not yet separate fixed from variable costs cleanly, that is often the first project when a company moves to proper financial steering, and it takes only a few weeks.
Check that the threshold is achievable
Translate required sales into contracts, units or deliverable hours. Compare them with demand, capacity and timing. The calculation assumes an appropriate contribution rate and fixed costs at that operating level. Hiring, pricing changes or a different sales mix require a new calculation.
The Bpifrance guide to break even explains the relationship between sales and costs. The next owner decision concerns cash: covering annual costs does not guarantee every payment can be made on time.
Key points
- The formula fits on one line: fixed costs divided by the contribution margin rate.
- Sorting fixed from variable costs matters more than the math; when in doubt, classify a cost as fixed.
- At a 60% margin, €60,000 of extra fixed costs require €100,000 of extra revenue just to stand still.
- A 5% price cut moves the threshold far more than a 5% rise in fixed costs.
- Express break even as a date too: a date moving up from November to September measures real progress.
Frequently asked questions
Should I express break even in revenue or as a date?
It is the same calculation read two ways. The euro amount tells you how much you need to sell; the date tells you when in the year the company starts earning for itself. In practice the date lands better with teams and makes years directly comparable, so keep both on your monthly dashboard.
Does my own salary belong in the fixed costs?
Yes, at a market level, even if you currently pay yourself less. A threshold computed without the owner’s compensation describes a business that only works because you subsidize it. Bankers and buyers make that adjustment automatically; better to make it before they do.
What is the difference between accounting break even and cash break even?
Accounting break even includes depreciation, which never leaves the bank account, and ignores loan repayments, which leave it every month. For an indebted company the cash threshold is therefore higher, sometimes substantially. When the real question is whether the bank account holds, swap depreciation for loan installments in the calculation.
How often should I recalculate my break even point?
Once a year at budget time, and before any decision that changes the cost structure: a hire, new premises, a financed investment, a price move. With clean bookkeeping the update takes an hour. The part that takes time is the initial sorting of fixed and variable costs, and that work serves you all year.
Which changes would improve your profitability?
See how to compare pricing, costs and volume before deciding where to act.
Find ways to improve profitability