What is break-even analysis?

Working out how much you need to sell to cover your costs — the point at which the business stops losing money, before it makes any.

The two cost types it depends on:

Fixed costs do not change with volume — rent, salaries, insurance, software, accountancy. You pay them whether you sell one unit or a thousand.

Variable costs change directly with each sale — materials, packaging, payment processing fees, delivery.

The distinction is about behaviour with volume, not about size or predictability, and getting it wrong invalidates everything downstream.

The calculation.

Contribution per unit = selling price − variable cost per unit. This is what each sale contributes toward fixed costs.

Break-even volume = fixed costs ÷ contribution per unit.

Fixed costs of £5,000 a month, a £50 price and £20 variable cost gives £30 contribution and a break-even of 167 units a month.

Break-even revenue = fixed costs ÷ contribution margin percentage. With a 60% contribution margin, £5,000 of fixed costs needs about £8,333 of sales.

What it is genuinely useful for:

Sanity-checking a plan. If break-even requires more customers than plausibly exist in your market, the model is wrong — and this is the most valuable use, because it surfaces the problem before you spend money.

Pricing decisions. A price cut requires a calculable volume increase to stand still, and the required increase is frequently far larger than people assume.

Understanding new fixed costs. Hiring someone adds a known amount of sales you must generate to stand still.

Margin of safety — how far sales can fall before you hit break-even.

What it cannot do:

Costs are not neatly fixed or variable. They are stepped — one more member of staff, a bigger unit — so the model is linear and reality is not.

It ignores cash timing entirely. Breaking even on paper does not mean money is in the bank.

It assumes one product or a constant mix.

General information, not financial advice.