How to Calculate Your Break-Even Point as a New Business Owner

Oct 15

5 min read

Before you sign a lease, set your prices or apply for financing, it helps to know one number: how much you must sell each month to cover your costs. That number is your break-even point. Below it, the business loses money. Above it, the business starts to earn a profit.

The math is simple, but the answer is only as reliable as the costs and prices you put into it. Here is how to work out your break-even point step by step, and how to use it to make better decisions in your first year.

Step 1: Sort your costs into fixed and variable

Go through your expected monthly costs and put each one into one of these groups.

Fixed costs stay about the same each month, whatever you sell: rent, insurance, software subscriptions, phone and internet, bookkeeping fees, loan interest and the wages of staff you pay regardless of sales.
Variable costs rise and fall with each sale: materials or ingredients, packaging, shipping, payment processing fees, sales commissions and labour paid per job.
Mixed costs, such as utilities or a vehicle, have a fixed base plus a usage charge. Split them into a fixed part and a variable part, or treat them as fixed if the usage part is small.

Two rules keep this step honest. First, include a realistic monthly pay for yourself in fixed costs. A business that only breaks even before paying its owner does not yet support you. Second, leave out one-time startup costs such as equipment or renovations. Those belong in your startup budget, while break-even looks at a typical month of operations.

Step 2: Work out your contribution margin

Contribution margin is the amount each sale leaves over, after its variable costs, to help pay your fixed costs.

Contribution margin per unit = selling price − variable cost per unit
Contribution margin ratio = contribution margin per unit ÷ selling price

Use prices before sales tax. As the CRA explains, GST/HST you collect is held in trust and must be remitted for each reporting period. The same goes for provincial sales tax where it applies, such as PST collected in Saskatchewan, which is remitted to the province. None of it is your revenue.

If you sell several products or services, calculate the contribution margin for each one, then a weighted average based on the sales mix you expect.

Step 3: Calculate your break-even point

With your fixed costs and contribution margin in hand, two formulas give you the answer:

Break-even in units = monthly fixed costs ÷ contribution margin per unit
Break-even in sales dollars = monthly fixed costs ÷ contribution margin ratio

Here is a simple illustration with round numbers. Say a small bakery expects fixed costs of $6,000 a month, including the owner's pay. Its average item sells for $8 before tax, and ingredients, packaging and card fees come to $3 per item.

Contribution margin per item: $8 − $3 = $5
Contribution margin ratio: $5 ÷ $8 = 62.5%
Break-even in units: $6,000 ÷ $5 = 1,200 items a month
Break-even in sales: $6,000 ÷ 62.5% = $9,600 a month

If the bakery is open 25 days a month, that is 48 items a day. Your figures will differ, but the method is the same.

For a service business, use billable hours as the unit. If your fixed costs are $4,000 a month and each billable hour brings in $80 after variable costs, you need 50 billable hours a month to break even. Then compare that number with the hours you can actually bill once administration, marketing and travel time are taken out.

Step 4: Check your margin of safety and cash needs

Break-even is a starting point. Three follow-up checks show how much room you really have.

Margin of safety: how far sales can fall before you reach break-even. Calculate it as (expected sales − break-even sales) ÷ expected sales. If the bakery expects to sell 1,500 items a month, its margin of safety is (1,500 − 1,200) ÷ 1,500 = 20%. A thin margin means one slow month can push you into a loss.
Cash break-even: some payments, such as loan principal, use cash but are not expenses, while depreciation is an expense that uses no cash. Add principal repayments to your fixed costs and leave out non-cash expenses. In the illustration, $500 a month of loan principal raises the cash break-even to $6,500 ÷ $5 = 1,300 items.
Time to break-even: sales often take months to build. Estimate the month you expect to reach break-even, and make sure your startup budget and cash flow forecast cover the shortfall until then.

Step 5: Use break-even to test your decisions

Once the model is set up, change one assumption at a time and watch the break-even point move. Using the bakery illustration:

Rent: a location that costs $500 more a month raises break-even from 1,200 to 1,300 items.
Supplier costs: if ingredients rise by $0.50 per item, the contribution margin falls to $4.50 and break-even rises to about 1,334 items.
Pricing: a $0.50 price increase lifts the contribution margin to $5.50 and lowers break-even to about 1,091 items, as long as customers keep buying at the higher price.
Hiring: divide the full monthly cost of a new employee by your contribution margin per unit to see how many extra sales the hire must support.

Run these scenarios before you commit, not after. BDC's free guide to sensitivity analysis explains this kind of testing in more detail.

Common break-even mistakes to avoid

Leaving out your own pay, which makes the business look healthier than it is.
Including GST/HST or PST in your selling price.
Forgetting small variable costs such as card fees, delivery, spoilage, returns or platform commissions.
Mixing one-time startup costs into your monthly fixed costs.
Using one average month for a seasonal business instead of checking slow and busy months separately.
Treating break-even as the goal. At break-even you earn no profit, so your plan should show a path beyond it.
Never updating it. Recalculate when rent, prices, supplier costs or staffing change.

How First Global Citizen can help

We build break-even analysis into the business plans and feasibility studies we prepare for founders. We help you sort your costs, document your pricing assumptions, calculate your break-even point and margin of safety, and test the scenarios that matter before you sign a lease or apply for financing. Learn more about our business plan and feasibility study services.

Every engagement starts with a written proposal and a fixed fee. We do not provide accounting or tax advice; when you need it, we coordinate with independent licensed professionals. To talk through your numbers, book a free consultation.

This article is general information only. It is not legal, tax, accounting or financial advice. Fees and requirements can change, so confirm current details with the relevant government agency or registry. For advice about your situation, consult a qualified professional.