How do I work out my break-even point?
Quick answer
Your break-even point is the sales you need each month to cover all your costs, with nothing left over. Work it out by dividing your monthly fixed costs by your gross margin percentage. If your fixed costs are $20,000 and your gross margin is 40%, you need $50,000 in monthly sales to break even.
What is a break-even point and how do I calculate it?
Your break-even point is the level of sales where the business covers every cost and makes zero profit. Below it, you lose money. Above it, every extra dollar of gross profit is profit.
The simple formula is:
Break-even sales = monthly fixed costs ÷ gross margin %
Fixed costs are the bills that arrive whether you're busy or quiet: rent, wages for permanent staff, insurance, software, loan repayments, your own drawings. Gross margin is the share of each sales dollar left after paying for what goes directly into the sale, such as stock, materials or subcontractors.
Say your fixed costs are $12,000 a month and your gross margin is 30%. Divide $12,000 by 0.30 and you get $40,000. That's the sales you need each month just to stand still.
Knowing this number changes how a month feels. A quiet week is less scary when you know you're still on track to pass $40,000. A busy week makes more sense when you can see how far past break-even it pushes you. Work out your figures excluding GST so they match your profit and loss.
What is gross margin and how is it different from net profit?
Gross margin tells you if each sale is worth making. Net profit tells you if the whole business is worth running. You need both.
Gross margin % = (sales minus direct costs) ÷ sales × 100. If you sell a job for $1,000 and the materials and labour on it cost $600, your gross profit is $400 and your gross margin is 40%.
Net profit % = net profit ÷ sales × 100. This is what's left after fixed costs too: rent, admin, marketing, everything.
The two can move separately. Your gross margin might be healthy, but if overheads have crept up, net profit shrinks. Or your overheads might be lean while rising supplier prices quietly eat your gross margin.
Check both every month. Your bookkeeping software can usually show them on one page. If either number is slipping, you'll catch it early, while it's still a small fix like a price adjustment or a supplier conversation, rather than a problem you discover at EOFY.
Why are sales, profit and cash three different numbers?
It's possible to have a record sales year and still struggle to pay the bills. That's because sales, profit and cash measure different things.
- Sales is what you invoiced.
- Profit is what's left after costs.
- Cash is what's actually in the bank right now.
Sales can rise while profit falls, if the extra work was won on thin margins or discounts. Profit can look fine while cash is tight, if customers pay slowly, you've bought stock ahead, or BAS, GST and super payments are due.
A common myth is "I'll sort out the numbers when I'm bigger." Growing a business you can't measure usually means growing the problems too. Bigger sales on poor margins just means working harder for the same result.
You don't need a complicated system to start. A simple monthly look at three things is enough: sales against break-even, gross margin, and cash in the bank compared with what's owed to you and what you owe.
What is a customer worth over a lifetime?
Customer lifetime value is the total a typical customer spends with you over the whole relationship, not just one sale.
Lifetime value = average spend per visit × visits per year × years they stay
If a customer spends $400 a visit, comes back four times a year and stays for five years, that's $400 × 4 × 5 = $8,000 in sales.
Take it one step further and apply your gross margin. At 40%, that customer is worth $3,200 in gross profit. That's the number to compare against what it costs to win them.
Suddenly spending $100 on advertising or a first-visit offer to win a new customer looks very different. It's not $100 to make one $400 sale. It's $100 to start a relationship worth thousands.
Lifetime value also shows why keeping customers matters. Getting people to return one extra time a year, or stay one extra year, can lift profit more than chasing new ones. Follow-ups, reminders and good service are profit tools, not just nice extras.
Do I know which customers and jobs make me money?
Here's a pattern I see often. Picture an owner who has built a printing business from nothing over twenty years. He's brilliant at his craft but has no idea which jobs make him money.
Sit him down with his profit and loss and his last 50 invoices, and within an hour he can see that his biggest customer is also his least profitable. The volume felt good, but the discounts, rush jobs and extra revisions were eating the margin.
So he renegotiates that account, stops saying yes to rush jobs at standard rates, and starts checking his margin every month. Decisions get easier because he can finally see where the profit comes from.
You can do the same exercise. Pull your last 30 to 50 invoices and, for each one, estimate the direct costs and time involved. Sort them by gross margin. You'll often find a few customers or job types doing most of the work for your profit, and a few dragging it down.
Sometimes the answer to growth is doing less of the wrong work.
Worked example: break-even, a 5% price rise and a 10% discount
These are made-up numbers for a simple example business.
Starting point (monthly, excluding GST)
- Sales: $50,000
- Direct costs: $30,000
- Gross profit: $20,000, so gross margin is 40%
- Fixed costs: $15,000
- Net profit: $5,000, which is 10% of sales
Step 1: Break-even. $15,000 ÷ 0.40 = $37,500. The business needs $37,500 in sales each month to cover costs.
Step 2: Add a 5% price rise. Same customers, same work. Sales rise to $52,500. Direct costs stay at $30,000, so gross profit becomes $22,500. Take off $15,000 fixed costs and net profit is $7,500.
A 5% price rise has lifted profit by 50%, from $5,000 to $7,500. The new gross margin is about 42.9%, and break-even drops to $35,000.
Step 3: Compare a 10% discount. Sales fall to $45,000. Direct costs stay at $30,000, so gross profit is $15,000. After fixed costs, net profit is zero.
To get back to $20,000 gross profit at the new margin of 33.3%, the business would need $60,000 in sales. That's a third more work just to stand still. Small price changes cut both ways, so test them on paper first.
Key numbers
| Number | What it is | Why it matters |
|---|---|---|
| Fixed costs ÷ gross margin % | Break-even sales | Use monthly figures excluding GST. $12,000 ÷ 0.30 = $40,000. |
| (Sales minus direct costs) ÷ sales × 100 | Gross margin % | Tells you whether each sale is worth making. |
| Net profit ÷ sales × 100 | Net profit % | Tells you whether the whole business is worth running. |
| Spend per visit × visits per year × years | Customer lifetime value | Multiply by gross margin % to see lifetime gross profit. |
| (Actual sales minus break-even sales) ÷ actual sales | Margin of safety | How far sales can fall before you start losing money. |
Steps to take this week
- Open your profit and loss for the last three to six months and list your average monthly fixed costs.
- Work out your gross margin %: sales minus direct costs, divided by sales.
- Divide your fixed costs by your gross margin % to get your monthly break-even sales, and write it somewhere you'll see it.
- Pull your last 30 to 50 invoices and sort them by gross margin to spot your most and least profitable customers.
- Calculate the lifetime value of a typical customer and compare it with what you spend to win one.
- Book 30 minutes in your calendar each month to check sales, gross margin and cash.
Frequently asked questions
What counts as a fixed cost?
Fixed costs are expenses that stay roughly the same no matter how much you sell, such as rent, insurance, software, permanent wages and loan repayments. Include a fair wage or drawings for yourself, otherwise your break-even will look lower than it really is.
Should I include GST in my break-even calculation?
No. Work with figures excluding GST, because GST collected belongs to the ATO and isn't your income. Your profit and loss is usually already shown excluding GST, so it's the easiest source.
What's the difference between margin and markup?
Markup is profit as a percentage of cost, while margin is profit as a percentage of the selling price. A $60 item sold for $100 has a 67% markup but a 40% margin, so make sure you use margin in the break-even formula.
How often should I recalculate my break-even point?
Check it at least quarterly, and any time a big cost changes, such as a new lease, a new hire or a supplier price rise. Many owners find a quick monthly check keeps it front of mind.
What if my business sells lots of different products or services?
Use your overall gross margin from the profit and loss as a starting point, since it reflects your actual sales mix. If your mix shifts towards lower margin work, your break-even will rise, which is another reason to check margin monthly.