Your break-even point, what it is and why every business should know it
Every business, regardless of size or industry, has one essential number it must understand to operate sustainably, the break-even point. This figure shows the minimum revenue needed to cover all your costs, and without knowing it, you're essentially flying blind. For small business owners, understanding your break-even point helps set realistic sales goals, price goods and services strategically, and manage financial risk with greater clarity and confidence.
What is the break-even point?
The break-even point (BEP) is the point at which your business’s revenue exactly matches its total costs. At this point, you’re not making a profit but you’re not incurring a loss either. Once you pass the break-even point, your business starts making a profit.
Actions:
· Identify your fixed costs (e.g., rent, salaries, insurance).
· Identify your variable costs (e.g., materials, shipping, sales commissions).
· Calculate your break-even point (fixed costs ÷ (selling price per unit – variable cost per unit)
· Calculate it for each major product or service.
· Revisit and update your break-even analysis quarterly.
Pick one of your core products or services and run a simple break-even calculation. Use it to set a minimum monthly sales target that covers your costs.
Why it matters for pricing strategy
Many small businesses underprice their goods or services, especially when starting out. Knowing your break-even point helps ensure your prices actually cover your costs and contribute to profitability. Understanding your BEP allows you to test different pricing strategies and assess how price changes affect profitability.
Actions:
· Compare your current prices to your break-even thresholds.
· Test what happens to your BEP if you raise prices by 5–10%.
· Consider bundling goods or services, or adding value-enhancing features to increase perceived value.
· Use BEP to price new products with confidence.
· Check how discounts impact your ability to break even.
Run a pricing scenario and adjust your price up or down to see how many additional (or fewer) units you’d need to sell to break even. This can help you find the sweet spot.
Helps control costs and improve margins
Knowing your break-even point also shines a spotlight on your cost structure. It can help you identify areas where you can reduce expenses or improve efficiency to lower your break-even threshold. Reducing costs means you need to generate less revenue to start earning a profit.
Actions:
· Review fixed costs annually and negotiate where possible.
· Track variable costs and compare suppliers for better rates.
· Improve operational efficiency to reduce labour or delivery costs.
· Identify low-margin products and either improve or phase them out.
· Set margin targets and review them regularly against your BEP.
Pick one fixed and one variable cost this month to review and reduce. Small savings here can lower your break-even point and boost your profitability.
Supports smarter decision-making
Your break-even point is a valuable tool for scenario planning, whether you’re launching a new product, expanding to a new location, or planning a price change. It helps you evaluate whether your plans are financially viable. This helps avoid unnecessary risk and ensures that every business decision is grounded in financial reality.
Actions:
· Use BEP to test new business models or product lines.
· Run break-even calculations for different revenue goals.
· Model how cost increases or price changes affect BEP.
· Use it as a checkpoint in your business plan.
· Share it with advisors or investors to validate assumptions.
Create a “what-if” break-even model with 3 scenarios, best case, base case, and worst case. Use these to guide strategic conversations and decisions.
Essential for goal setting and growth tracking
Your break-even point gives you a measurable financial milestone. It sets a baseline for survival and helps you set realistic growth targets that go beyond simply “staying afloat.” You can align your marketing, sales, and operations efforts to consistently beat your break-even threshold.
Actions:
· Set monthly revenue targets based on break-even and profit goals.
· Use BEP as a team KPI to measure performance.
· Align sales campaigns to periods where you're closest to BEP.
· Celebrate the moment you break even each month.
· Build a forecast that tracks how far above BEP you aim to be.
Add your break-even point to your business dashboard or scorecard. Start tracking how many days into each month you hit break-even, then aim to shorten that timeline.
Final thoughts
Understanding and using your break-even point isn’t about being a financial expert – it’s about staying in control. With just a few basic calculations and consistent monitoring, you’ll gain the clarity and confidence to run a more profitable business. Whether you're launching a new product, adjusting your prices, or planning for growth, your break-even point should be one of your go-to tools.
Need help applying these insights to your own numbers? Our Wellington business advisory team is here to support you. Contact us today to get started.
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