Break-even analysis: When will your business become profitable?

Published 20 January 2026

Table of contents

• What is a break-even analysis?
• Break-even formula and key terms
• How to calculate your break-even point
• How to lower your break-even point
• Make break-even point analysis simple with Xero
• FAQs on break-even analysis

Key takeaways

• Use the break-even formula to find the sales level where you cover all costs.
• Calculate the break-even point in both units and sales dollars to set clear targets.
• Lower your break-even point by improving the contribution margin and trimming fixed costs.

What is a break-even analysis?

Break-even analysis shows you how much you need to sell to break even (the point at which your revenue equals your total costs) and start making a profit. It helps you understand how changes in your costs or changing your selling price can affect when you break even. Use this analysis to think about what-if scenarios – what if we open a new location, what if we hire more staff, what if we raise prices, and so on.

If you know what your break-even point is, you (and any investors in your business) can make informed decisions about your operations. To do the analysis properly, you need the break-even formula, which shows you exactly how many products or services you need to sell to break even – or how much revenue you must collect to cover your costs.

The U.S. Small Business Administration has more details about the break-even point.

Break-even formula and key terms

The break-even formula gives you the exact financial number at which your costs are covered and you’ll begin to make a profit. Although the formula is often used by manufacturers, it’ll also help you if you’re a service provider, software developer, or an investor.

There are two break-even formulas – one to calculate your break-even point in dollars, the other to calculate your point in units sold. Both formulas require the same numbers:

• fixed costs: the amount you'll spend even if you don't make a single sale (your overheads)
• variable costs: how much you spend to produce each unit or provide each service
• sales price per unit: the price of the product or service

You'll also need the contribution margin, which is the portion of your revenue that covers fixed costs – but you can easily calculate that if you know your variable costs and sales price.

Check out this IRS resource on business expenses to learn more.

How to calculate your break-even point

Now you know what the break-even point is, but how do you calculate it? Let's bring it all together with the break-even point formula.

1. Gather your costs and price

First, add up all your fixed costs – to make sure you don't miss anything, consider using accounting software that lets you bring in all the expenses from your bank accounts and credit cards. Then, determine your variable costs (costs per item).

2. Find the contribution margin ratio

To calculate your contribution margin ratio, use this formula:

(Selling price – variable costs)/selling price = contribution margin ratio

For example, say your variable costs are $1 per unit and you sell the product for $2. Then, your contribution margin ratio is 0.5 or 50%.

3. Find the break-even point in sales units

To figure out how many units you need to sell, plug your numbers into the break-even point in units formula:

Fixed costs / (selling price per unit – variable cost per unit) = break-even point (units)

Let's say your fixed costs are $100,000, you make a product for $20, and you sell the product for $30 – when you plug in these numbers, you get $100,000 / ($30-$20) = 10,000. That means you need to sell 10,000 units to break even.

But what if you change your price? How does that affect your break-even point? To look at different scenarios, you might want to create a break-even chart showing different break-even points for different prices.

As you can see, reducing your selling price by $5 requires you to double your sales to break even, but if you raise your price by $10, you only need to sell half as many units to break even. A chart also lets you compare what happens if your fixed or variable costs change.

4. Find the break-even point in sales dollars

To find the break-even point in dollars, divide fixed costs by the contribution margin ratio:

Fixed costs / contribution margin ratio = break-even point (revenue)

First, calculate your contribution margin – let's say your ratio is 0.5 and your fixed costs are $100,000. When you divide 0.5 into $100,000, you get a result of $200,000. That means you need $200,000 in revenue to cover fixed and variable costs.

The basic formula helps you calculate the break-even point for a single product or service. It gets more complex if you want to calculate the break-even point for multiple products or services with different price points.

How to lower your break-even point

Reducing costs and increasing revenue will boost your profitability – keep these tips in mind if you want to lower your break-even point and turn a profit faster.

• Raise prices where your value supports it: make sure you understand your market and raise prices if your value supports that.
• Improve your contribution margin by cutting variable costs: identify waste and look for areas where you could improve efficiency.
• Reduce fixed costs that do not drive sale: are you spending too much on fixed costs that don't support sales? If so, it's time to cut.
• Invest in strategies to boost sales: sometimes increasing fixed costs can help drive sales. Consider how increasing your sales or marketing budget may help you reach the break-even point sooner, even if you have to sell more to get there.
• Increase average order value through bundles or add-ons: the more you sell, the sooner you break even. Try to increase the value of each order with bundles or add-ons.
• Use scenarios to balance price, volume, and margin: the break-even equation has three critical elements (sales price, sales volume, and contribution margin). All these numbers affect your break-even point. Use scenario analysis to make sure you're balancing these numbers.

At a certain point, you might need to increase fixed costs to make more units or provide more services. For instance, you might need more equipment to keep up with production volume or more admin staff to support your service business. Make sure you understand marginal costs, which are the incremental costs of producing one more unit, and how that affects break-even analysis.

SCORE has a break-even analysis template to help you get started.

Make break-even point analysis simple with Xero

Profit is the reason you run a business – and to use the accounting break-even formula properly you need accurate numbers every time.

Xero’s tools give you the accurate, up-to-date figures on your business finances to calculate your break even points. Use this small business accounting software to track fixed and variable costs. It’s intuitive and easy to use, and it’s everything you need to stay on top of your finances in one place.

Get one month free

FAQs on break-even analysis

Have more questions? Here are answers to some of business owners' most common questions:

When should I use break-even analysis?

Do break-even analysis any time you need to make a major business decision – that includes opening a new business, launching a new product, expanding production capabilities, bringing on new staff, or changing prices.

What costs are fixed vs variable?

Fixed costs stay the same no matter how many units you produce – for instance, fixed costs include rent or mortgage, utilities, and admin costs. Variable costs are the costs that change according to the number of units you produce – the supplies or labor you need to produce each unit, for example.

What is the break-even point in units vs dollars?

The break-even point in dollars shows how much revenue you need to break even, while the per-unit break-even point is the number of units you must produce to break even. For instance, if your fixed costs are $100,000, your variable costs per unit are $2, and your selling price is $6, you need to make 25,000 units. Or, you need $150,000 in revenue. Play with these numbers to see how the break-even point changes if you reduce costs, raise prices, or make other changes.

Does break-even analysis work for services or SaaS?

Yes, break-even calculations can work for services or software as a service (SaaS). The calculation is basically the same:

• calculate fixed costs such as rent, insurance, and admin
• determine the variable costs – how much you spend each time you provide the service or the Saas
• set your selling price.

Now you're ready to plug those numbers into the break-even formula.

What is a margin of safety and why does it matter?

The margin of safety shows the difference between current or anticipated sales and your break-even point. In other words, how safe are you – how much can sales drop before you stop breaking even and start losing money?

Here’s more on the margin of safety and how to calculate it.