Guide
Break-even analysis, explained properly
Break-even answers one question: how much must be sold before the business stops losing money? It is the most useful single number in a small-business plan.
Break-even volume equals fixed costs divided by contribution margin per unit, where contribution margin is price minus variable cost. The result is the number of units needed before the business covers its fixed cost base.
The formula, with a worked example
Illustrative example only — invented figures for a fictional business.
| Item | Value |
|---|---|
| Selling price per unit | SAR 40 |
| Variable cost per unit | SAR 16 |
| Contribution margin per unit | SAR 24 |
| Fixed costs per month | SAR 36,000 |
| Break-even units per month | 1,500 |
| Break-even revenue per month | SAR 60,000 |
Check: 1,500 × SAR 24 = SAR 36,000, which covers the fixed costs exactly.
Why contribution margin matters more than gross margin
Gross margin includes only direct production costs. Contribution margin includes every cost that moves with a sale — packaging, delivery, payment fees, commissions.
A business can look healthy on gross margin and still lose money on every incremental order because the variable costs outside production were never counted. When in doubt, include more in variable costs and see whether the business still works.
Multi-product businesses
With several products, calculate a weighted contribution margin:
| Product | Share of sales | Price | Variable cost | Contribution |
|---|---|---|---|---|
| A | 50% | 40 | 16 | 24 |
| B | 30% | 70 | 40 | 30 |
| C | 20% | 25 | 9 | 16 |
| Weighted | 100% | 24.2 |
Break-even = fixed costs ÷ weighted contribution. The assumption is the sales mix; if the mix shifts toward lower-margin products, break-even rises.
Reading the result
- Break-even is far below capacity — the business has room to absorb a slow start.
- Break-even is close to capacity — little margin for error; a 10% shortfall in demand produces a loss.
- Break-even is above capacity — the model does not work at this cost base. Change price, cost, or scope.
That third case is the one founders resist. It is also the most valuable output of the exercise.
Separating operating break-even from debt service
A lender will want to know whether cash generated after operating costs covers the instalments. So present two figures:
- Operating break-even — fixed operating costs ÷ contribution margin.
- Cash break-even including debt — (fixed operating costs + instalments) ÷ contribution margin.
The second is higher. It is also the number that determines whether the loan is comfortable or tight.
Common mistakes
- Omitting owner salary from fixed costs.
- Treating a step cost (a second shift) as variable.
- Using annual fixed costs with monthly volume.
- Ignoring seasonality: a business can break even annually and fail in a low month.
- Presenting break-even without stating the assumptions behind it.
Where it belongs in the plan
In the financial section, immediately after the P&L, with a one-paragraph interpretation. It is also worth a line in the executive summary, because it tells a reader how much room the business has.
See financial projections for building the underlying model, or the financial modelling service if you want it built for you.