The break-even point is the level of sales at which the business neither makes a profit nor a loss. It answers the question every owner asks: how much do I need to sell? Knowing the number turns hopes into targets and shows quickly whether a plan is realistic. The maths is simple, and the insight is valuable.

Fixed and variable costs

Break-even begins by splitting costs into two groups:

  • Fixed costs do not change with sales in the short term: rent, salaries, licences, insurance, loan repayments, internet.
  • Variable costs rise and fall with sales: stock bought for resale, packaging, delivery, sales commissions, card or mobile money fees.

Some costs are mixed, such as electricity, and can be split into a fixed part and a variable part. Do the split from your bookkeeping records: bookkeeping for small businesses.

The formula

Contribution per unit = selling price less variable cost per unit.

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

Break-even sales = break-even units × selling price. When you cannot work out a unit, use the contribution margin ratio: contribution ÷ sales, and divide fixed costs by it.

Example 1: a small shop

A shop has fixed costs of KES 120,000 a month (rent, wages, utilities and licences). Its goods earn an average margin of 25 percent after the cost of goods.

Break-even sales = 120,000 ÷ 0.25 = KES 480,000 a month. If the shop sells KES 600,000, the profit before tax is KES 150,000 less KES 120,000, which is KES 30,000. The owner can see that sales of less than KES 480,000 produce a loss, and that a small rise in margin has a large effect.

Example 2: a service business

A consultant has monthly fixed costs of KES 80,000 and charges KES 5,000 an hour. Variable costs are KES 500 an hour for transport and software. Contribution is KES 4,500 an hour.

Break-even hours = 80,000 ÷ 4,500 = about 18 hours a month. Every hour beyond that adds KES 4,500 to profit.

Example 3: making products

A baker has fixed costs of KES 60,000, sells loaves at KES 80 and spends KES 50 on ingredients and packaging. Contribution is KES 30. Break-even = 2,000 loaves a month, or about 67 a day.

Include tax in the picture

Break-even before tax shows operating survival. For planning, add the tax. A business on turnover tax pays 3% of gross sales, which acts like a variable cost: contribution falls by that share of the price. Check with the turnover tax calculator. A VAT-registered business should use prices without VAT, since VAT is not income: see VAT for small businesses. Companies pay corporation tax on profit: estimate it with the corporation tax calculator.

Use the template

The break-even and pricing calculator computes the numbers from your costs. For several products, use the multi-product break-even analysis, which weights each product's margin by its share of sales.

Test decisions with it

  1. Raising prices. A 10 percent price rise with the same costs raises contribution sharply and lowers break-even. See how to price your products and services.
  2. Hiring staff. A new salary adds fixed cost. How many extra sales do you need to cover it?
  3. Cheaper rent. Moving premises changes fixed costs.
  4. Discounts. A 10 percent discount on a 25 percent margin cuts the margin to 15 percent, so you must sell far more to earn the same profit.
  5. Loans. Repayments are fixed costs: borrowing for your business.

Margin of safety

The margin of safety is actual sales less break-even sales, as a share of sales. A thin margin means one slow month can cause a loss. Seasonal businesses should check break-even month by month: seasonal business planning and tax savings.

Limits

Break-even assumes costs behave neatly and prices stay constant. Real costs change in steps. Use the result as a guide, then compare with actual results every month in the budget versus actual tracker.

Frequently asked questions

Should I include my own salary in fixed costs? Yes, if you want to know when the business supports you. Otherwise the break-even only shows when it covers its other costs.

How often should I recalculate break-even? Whenever prices, rent, wages or supplier costs change, and at least every quarter.

What if I sell many products with different margins? Use the weighted average margin, or a multi-product sheet, based on your actual sales mix.

Is break-even the same as payback period? No. Break-even is the sales level that covers costs. Payback is the time it takes to recover an investment.