How to Calculate the Break-Even Point for a Small Business

A café sells two hundred cups a day and the owner still feels uneasy at the end of each month. Is that enough? How many would be enough? Would a discount help or hurt? One calculation answers all three. The break-even point is the level of sales at which income exactly covers costs. Below it you lose money. Above it you earn.

Two kinds of cost

Everything rests on sorting costs into two groups.

Fixed costs do not change with the number of sales in a month:

• Rent.
• Salaries of permanent staff.
• Internet, software subscriptions.
• Loan instalments.
• Insurance.
• Depreciation of equipment.

Variable costs occur with each sale:

• Ingredients or the cost of the item sold.
• Packaging.
• Shipping.
• Payment and marketplace fees.
• Commission per sale.

Some costs are mixed. Electricity has a basic charge plus usage. Split them roughly. Precision to the last rupiah is not needed.

Contribution margin

For each unit sold:

Contribution margin = selling price - variable cost per unit

This is what each sale contributes toward paying the fixed costs. Once fixed costs are covered, it becomes profit.

The formula

Break-even units = fixed costs / contribution margin per unit

And in money:

Break-even sales = fixed costs / contribution margin ratio

where the contribution margin ratio is the contribution margin divided by the selling price.

A worked example

A café has monthly fixed costs of:

• Rent: Rp 8,000,000
• Staff: Rp 12,000,000
• Utilities and internet: Rp 2,500,000
• Other: Rp 1,500,000
• Total: Rp 24,000,000

Average selling price per cup: Rp 25,000. Variable cost per cup, including coffee, milk, cup and payment fee: Rp 9,000.

• Contribution margin: 25,000 - 9,000 = Rp 16,000.
• Break-even units: 24,000,000 / 16,000 = 1,500 cups a month.
• Open 26 days: about 58 cups a day.
• Break-even sales: 1,500 x 25,000 = Rp 37,500,000 a month.

Below 58 cups a day the café loses money. At 200 cups a day it is well above. The owner's unease must come from something else, such as costs not included or cash tied up in stock.

Adding the owner's income

A business that breaks even pays its costs and nothing to the owner. Include a fair salary for yourself in fixed costs, or use the target-profit version:

Units needed = (fixed costs + target profit) / contribution margin

If the owner wants Rp 10,000,000 a month: (24,000,000 + 10,000,000) / 16,000 = 2,125 cups, about 82 a day.

Using it for decisions

Should we discount?

A 20% discount brings the price to Rp 20,000. The contribution margin falls from 16,000 to 11,000, a drop of almost a third. Break-even rises from 1,500 to about 2,182 cups. The discount has to bring in 45% more sales just to stand still. That figure is worth knowing before printing the banner.

Can we afford another employee?

A new staff member at Rp 4,000,000 raises fixed costs to 28,000,000. Break-even becomes 1,750 cups, which is 250 more a month, about ten a day. Will the new person bring in or enable at least ten more sales a day?

What if ingredient prices rise?

If variable cost rises by Rp 2,000, the margin falls to 14,000 and break-even climbs to about 1,714. You can see at once how much price would have to rise to compensate.

Is a new branch viable?

Estimate the branch's fixed costs and its likely margin. The break-even volume tells you how many customers a day it needs. Compare that with a realistic count of the foot traffic at the location.

Several products

Most businesses sell more than one thing. Two approaches:

• Average margin. Total sales minus total variable costs, divided by total sales, gives the overall contribution margin ratio. Divide fixed costs by it to get break-even sales.
• By product. Calculate each product's margin to see which ones carry the business and which barely contribute.

Watch the mix. If customers shift toward low-margin items, break-even rises without any change in total sales.

Margin of safety

Margin of safety = (actual sales - break-even sales) / actual sales

If you sell Rp 60 million and break even at Rp 37.5 million, your margin of safety is 37.5%. Sales could fall by that much before you lose money. A thin margin of safety is a warning to reduce fixed costs or raise the contribution margin.

Limits of the calculation

• It assumes prices and costs stay constant. In practice they move.
• Fixed costs are fixed only within a range. Doubling sales may require more staff or space.
• It ignores the timing of cash. You can be above break-even and short of cash if customers pay late or money sits in stock.
• It is only as good as the cost figures. Review them every few months.

Treat it as a compass, not a map.

Four ways to lower your break-even

1. Raise prices where the market allows.
2. Lower variable costs: better supplier terms, less waste, cheaper packaging that still protects.
3. Lower fixed costs: renegotiate rent, drop unused subscriptions.
4. Shift the mix toward higher-margin products.

Each one improves the contribution margin or reduces what it has to cover.

Getting the numbers

The calculation takes five minutes. Gathering reliable cost figures takes longer, unless your bookkeeping already separates them. Polynusa keeps sales, costs and bookkeeping in one workspace, so the fixed and variable costs behind this calculation come from your own records. See the pricing page.

Summary

Separate fixed and variable costs. Subtract variable cost from price to get the contribution margin. Divide fixed costs by it to find break-even. Add your own income as a target. Then use the figure to test discounts, hires and price changes before you commit to them.

FAQ

What is the difference between fixed and variable costs?

Fixed costs stay roughly the same whatever you sell in a month, such as rent, salaries and subscriptions. Variable costs rise and fall with each sale, such as stock, packaging, shipping and payment fees. Separating the two is the first step in a break-even calculation.

How is break-even calculated for a business with many products?

Use the average contribution margin across your sales mix. Divide total fixed costs by the overall margin percentage to get break-even sales in currency. If the mix shifts toward lower-margin products, the break-even point rises even when total sales stay the same.

Does reaching break-even mean the business is healthy?

It means you are covering costs, which is the minimum. A healthy business sells comfortably above break-even, so that a slow month does not turn into a loss. The gap between actual sales and break-even sales is called the margin of safety.