How much do you need to sell to cover all of the month's costs?
A simple calculation shows the minimum sales needed to close the month without a loss.
Short answer: divide the month's total fixed costs by the contribution margin, which is the part of each sale left after variable costs. The result is the minimum revenue to break even. Any sale above that starts to generate profit.
Factors to consider
- The month's fixed costs: rent, salaries, subscriptions, accountant, insurance and other expenses that exist regardless of sales.
- Variable costs: raw materials, commissions, payment fees, packaging and shipping that grow with each sale.
- Contribution margin: the difference between price and variable costs, in currency or as a percentage of price.
- Owner's pay: your withdrawal as owner needs to be in the calculation, so the result does not mislead.
- Taxes: they depend on the company's regime and can work as a variable cost.
Formula
- Add up all of the month's fixed costs.
- Calculate the contribution margin as a percentage: (price − variable cost) ÷ price.
- Divide fixed costs by the margin percentage. The result is the minimum revenue.
An example
A shop has fixed costs of $8,000 a month. On average, variable costs (goods, fees, packaging) consume 60% of the price, so the contribution margin is 40%. Dividing 8,000 by 0.40, the minimum revenue to break even is $20,000. With sales of $25,000, the excess of $5,000 turns into $2,000 of profit (40% of 5,000). This is an illustrative example.
How to interpret it
The number you find is a reference, not a promise. Compare it with what the business sells today: if it is close to or above current sales, review price, costs or structure. If it is well below, there is room to invest. Redo the calculation whenever costs or prices change, and keep in mind that weak months call for a reserve.
Related tool
To do the math with your own numbers and test price and cost scenarios, use the business break-even calculator below.
Related tool: Business Break-Even Calculator