How to calculate your breakeven point
To calculate breakeven, divide your fixed costs by your gross margin percentage. A business with £20,000 of monthly fixed costs and a 60% gross margin needs £33,333 of monthly revenue to break even. The breakeven month is a more useful answer, and it comes from a forecast rather than a formula.
Breakeven is the point where the business stops losing money. There are two ways to express it, and they answer different questions.
Breakeven revenue: the formula#
Take your fixed costs for a period. Divide by your gross margin expressed as a decimal. The answer is the revenue you need in that period.
If your fixed costs are £20,000 a month and your gross margin is 60%, you need £20,000 ÷ 0.6, which is £33,333 of revenue a month. At that level, 60% of £33,333 is exactly £20,000 of gross profit, which exactly covers your fixed costs, leaving zero.
Getting the two inputs right#
Fixed costs are the ones you pay regardless of what you sell: rent, salaries, software, insurance, professional fees. Variable costs move with sales and belong in gross margin instead: materials, production, packaging, delivery, payment processing fees.
The classification is where most errors come from. Sales commission is variable. A salesperson's base salary is fixed. Warehouse rent is fixed even though it exists because of your stock. If you are not sure, ask whether the cost would still exist next month if you sold nothing.
Breakeven in units#
If you sell one main product, divide fixed costs by the gross profit per unit instead. A product selling at £4.00 with a £1.06 production cost contributes £2.94 a unit, so £20,000 of fixed costs needs about 6,803 units a month. This version is more useful in a business with a single product and less useful in one with many.
The breakeven month: the better answer#
What most people actually want to know is when, not how much. That cannot come from a formula, because it depends on how your sales grow and how your costs grow alongside them. It comes from a forecast: build the profit and loss month by month and find the month profit turns positive and stays there.
This also handles the thing the formula cannot, which is that your fixed costs are not fixed over time. Every hire raises the bar. A forecast shows breakeven moving out when you add the person and coming back in as revenue catches up, which is the actual shape of the decision.
Breakeven is not the same as not running out of money#
Breakeven is measured on profit. Cash is a separate question. A business can cross into profit and still be short, because customers pay late, VAT and corporation tax arrive in lumps, stock has to be bought before it is sold, and loan repayments never appear on the profit and loss at all. Work out your breakeven month and your runway together, and treat neither as a substitute for the other.