Break-even point

The level of sales at which total contribution margin exactly covers fixed costs, so profit is zero. Fixed costs ÷ CM ratio gives it in revenue; fixed costs ÷ contribution margin per unit gives it in units.

Example

£12,000 of fixed costs at a 70% CM ratio breaks even at £17,143 of monthly revenue.

Important

Break-even is a cash-flow question disguised as an accounting one. Knowing the number is only useful next to how many months of runway you have to reach it.

Related terms

• Contribution margin ratio (CM ratio) — Contribution margin as a percentage of revenue: (Revenue − Variable costs) ÷ Revenue. The share of every sales dollar left over to cover fixed costs and then become profit.
• Fixed costs — Costs that do not change with sales volume in the short term — rent, salaries, software subscriptions, insurance.
• Contribution margin — Revenue from a unit minus all the variable costs of producing and selling that unit — a step beyond gross margin because it also includes variable selling costs.
• Runway — How many months your company can keep operating before it runs out of money, at its current rate of spending.
• Default alive — The company reaches profitability on the money it already has, assuming current growth and spending. Default dead means it does not.

Lessons that explain it

• Contribution margin and the CM ratio — How much of each sale is left to cover everything else. One number, and it answers most of the questions founders take to spreadsheets. (13 min)
• Break-even and operating leverage — The revenue that makes you self-sufficient, and why the same structure that makes growth spectacular makes a bad quarter dangerous. (12 min)

All 176 terms in the Founder glossary