Break-Even Analysis: Knowing Your Minimum to Survive

What Is Break-Even and Why It Matters

Break-even is the point where your total revenue exactly equals your total costs. Below it, you lose money. Above it, you make money. Every business owner should know this number cold.

Knowing your break-even point answers critical questions:

• How much do I need to sell each month just to keep the lights on?
• Can I afford to lower my prices on this project?
• What happens if I lose my biggest client?
• How many jobs do I need per month?

If you do not know your break-even point, you are pricing blind and hoping for the best.

The Formula

Break-Even Point = Fixed Costs / (Revenue per Unit - Variable Cost per Unit)

Or, expressed as revenue:

Break-Even Revenue = Fixed Costs / Contribution Margin Ratio

Where Contribution Margin Ratio = (Revenue - Variable Costs) / Revenue

Let us break this down.

Fixed Costs vs. Variable Costs

Fixed Costs

These do not change based on how much work you do:

• Rent or mortgage
• Insurance premiums
• Salaries (for staff not tied to specific jobs)
• Loan payments
• Software subscriptions
• Utilities (base amounts)
• Accounting and legal retainers

Add these up for a monthly total. This is your monthly "nut" — the amount you owe whether you do zero jobs or fifty.

Variable Costs

These change directly with your sales volume:

• Materials and supplies
• Subcontractor labor
• Direct labor (hourly workers on jobs)
• Sales commissions
• Shipping and delivery
• Project-specific permits

Variable costs increase as you do more work and decrease when work slows down.

A Real Example

Let us say you run a small contracting business.

Monthly Fixed Costs:

• Office rent: $2,000
• Insurance: $1,500
• Office staff salary: $4,000
• Loan payment: $1,000
• Software/phone/utilities: $500
• Total Fixed Costs: $9,000/month

Average Job:

• Revenue per job: $15,000
• Materials: $4,500
• Subcontractor labor: $3,000
• Direct labor: $2,500
• Total Variable Cost per Job: $10,000
• Contribution Margin per Job: $5,000
• Contribution Margin Ratio: 33.3%

Break-Even Calculation:

• Break-Even Revenue = $9,000 / 0.333 = $27,000/month
• Break-Even in Jobs = $9,000 / $5,000 = 1.8 jobs/month

You need roughly two completed jobs per month or $27,000 in revenue just to cover your costs. Every dollar after that is profit.

What Break-Even Tells You About Pricing

If your break-even point is uncomfortably high, you have three options:

Lower Fixed Costs

Can you renegotiate rent? Reduce staff? Refinance a loan? Every dollar you cut from fixed costs directly lowers your break-even point.

Increase Contribution Margin

Raise prices, negotiate better material costs, or improve labor efficiency. If you increase your contribution margin from 33% to 40%, your break-even drops from $27,000 to $22,500.

Increase Volume

Sell more. But be careful — growing volume without fixing margin problems just scales your losses.

Break-Even for Multiple Products or Services

If you offer different services at different margins, calculate a weighted average contribution margin:

1. Determine the contribution margin for each service
2. Estimate the percentage of revenue each service represents
3. Calculate: (Margin A x % of Revenue A) + (Margin B x % of Revenue B) + ...
4. Use the weighted average in your break-even formula

This gives you a blended break-even that reflects your actual service mix.

Break-Even for Big Decisions

Run break-even analysis before major decisions:

Hiring a new employee: If the employee costs $5,000/month (salary plus taxes and benefits), how much additional revenue do you need? Divide $5,000 by your contribution margin ratio.

Buying equipment: A $50,000 truck with a $1,000/month payment raises fixed costs by $1,000. That requires $3,000/month in additional revenue at 33% margin.

Lowering prices to win a bid: If you cut your price by 10%, how does that affect contribution margin? Recalculate break-even to see if the volume makes up for the margin reduction. (Spoiler: it usually does not.)

Limitations of Break-Even Analysis

Break-even analysis is useful but imperfect:

• It assumes fixed costs are truly fixed (they are not, in extreme scenarios)
• It assumes variable costs per unit are constant (volume discounts can change this)
• It does not account for cash flow timing
• It is a point-in-time calculation that needs regular updating

Use it as a planning tool, not gospel. Recalculate whenever your costs, prices, or service mix changes significantly.

The Bottom Line

Your break-even point is the minimum bar for survival. Know it, monitor it, and make decisions with it in mind. When someone asks you to lower your price, you should be able to instantly calculate what that does to your break-even. When costs go up, you should know immediately how much more revenue you need. This is the kind of number sense that separates owners who survive from owners who wonder what went wrong.