Guide · 2026-07-12 · 6 min read

Written and reviewed by Project Financial Advisor · FCA · CGMA · ACMA — Chartered Accountant

Break-Even Analysis: Formula, Chart and Worked Example

Break-even analysis finds the point at which a business's revenue exactly covers its costs — the sales level at which it stops losing money and starts making it. It is one of the first questions any founder or lender asks, and one of the most useful sanity checks in a financial model. Here is the formula, a worked example, and the chart that makes it click.

The break-even formula

Break-even depends on three numbers: the price per unit, the variable cost per unit, and fixed costs. The difference between price and variable cost is the contribution margin — the amount each sale contributes toward covering fixed costs. Break-even units = fixed costs ÷ contribution margin per unit. Once fixed costs are covered, every further unit's contribution drops to the bottom line.

The break-even chart

Plotting total revenue and total cost against units sold shows the break-even point where the two lines cross. Below the crossing, the cost line sits above revenue (a loss); above it, revenue pulls ahead (a profit). The vertical gap between the lines at any volume is the profit or loss at that level.

Using break-even in decisions

Break-even answers practical questions: how many units must we sell to survive; how far can volume fall before we lose money (the margin of safety); and how a price change or a fixed-cost cut moves the threshold. A lower break-even point means a more resilient business — which is why raising contribution margin or cutting fixed costs is so powerful.

Break-even and cash

One caution: accounting break-even is not the same as cash break-even. Depreciation is a fixed cost that uses no cash, while debt repayments are a cash cost that never appears in the profit calculation. For survival, model the cash break-even too — the point where cash inflows cover cash outflows.

Model it automatically

Worked break-even example

Suppose fixed costs are $120,000 a year, a product sells for $50, and its variable cost is $30. Contribution margin is $50 − $30 = $20 per unit, so break-even = $120,000 ÷ $20 = 6,000 units, or $300,000 in revenue. Every unit beyond 6,000 adds $20 of profit. To earn a $40,000 target profit, add it to fixed costs: ($120,000 + $40,000) ÷ $20 = 8,000 units.

You can also express break-even in revenue directly as fixed costs ÷ contribution-margin ratio. Here the ratio is $20 ÷ $50 = 40%, so break-even revenue = $120,000 ÷ 0.40 = $300,000 — the same answer.

EasyFinancialModels computes contribution, break-even and the payback period inside every model, and shows the cash view alongside the accounting view. Build a financial model free for up to 3 years and find the volume your business needs to turn profitable.

Beyond the single break-even point

Real businesses rarely sell one product at one price, so extend the basic formula with a weighted-average contribution margin across the product mix, and recompute break-even whenever that mix shifts. It also pays to distinguish the cash break-even — which strips out non-cash costs like depreciation — from the accounting break-even, because a business can be above its cash break-even while still reporting a small loss. Used this way, break-even analysis becomes a planning tool rather than a one-off calculation: it tells you the volume each pricing or cost decision requires, frames the margin of safety in current forecasts, and highlights how operating leverage magnifies both profits and losses as sales move away from the break-even line.

Cash flow break-even: a different question

Accounting break-even asks when profit reaches zero. Cash flow break-even asks when the bank balance stops falling — and for a business managing runway, the second question is the one that matters. The formula adjusts two lines: cash break-even units = (cash fixed costs + debt principal payments) ÷ contribution margin per unit. Depreciation drops out of fixed costs because no cash leaves when an asset ages; loan principal comes in because cash certainly leaves, even though the P&L never shows it.

### Reading the gap between the two

Here the cash break-even sits below the accounting one, because depreciation ($20,000) exceeds principal ($15,000) — typical of a capital-light business that borrowed modestly. Flip the balance sheet and the ranking flips with it: a heavily indebted company with old, fully-depreciated assets can be profitable on paper while still bleeding cash, because principal repayments tower over a shrinking depreciation charge. Businesses in that position watch the cash break-even and treat the accounting figure as a formality; businesses with fresh assets and little debt can safely do the reverse. Knowing which regime you are in is the entire point of computing both.

Break-even and operating leverage

The break-even point also reveals how a business will behave once it crosses it. A high-fixed-cost operation — software, manufacturing, a hotel — sits far from break-even but accelerates hard past it, because each additional sale carries a fat contribution margin with nothing left to absorb. A variable-cost-heavy business breaks even early and then grinds, adding thin margin per unit forever. Neither is better; they are different risk shapes. The high-leverage shape rewards scale and punishes shortfalls, which is why the margin of safety matters most exactly where operating leverage is highest.

### For a cash-burning startup: time to break-even

Early-stage companies use the same arithmetic on a different axis. Instead of asking how many units, ask how many months: at the current growth rate, when does monthly contribution cover monthly cash fixed costs plus debt service? That crossing point — the cash-flow break-even month — divided into cash on hand is the runway question every board asks. A cash flow forecast with the break-even month visible on the dashboard answers it before the meeting does.

Frequently asked questions

What is the break-even formula?

Break-even units = fixed costs ÷ (price − variable cost per unit). The denominator is the contribution margin per unit — the amount each sale contributes to covering fixed costs.

What is the break-even point?

The sales level at which total revenue equals total costs, so profit is zero. Beyond it, each additional unit's contribution margin becomes profit.

How do I lower my break-even point?

Raise price, cut the variable cost per unit (improving contribution margin), or reduce fixed costs. Any of these lowers the volume needed to break even.

What is the cash flow break-even formula?

Cash break-even units = (cash fixed costs + debt principal payments) ÷ contribution margin per unit. It differs from accounting break-even by removing depreciation (no cash leaves) and adding loan principal (cash leaves but never touches the P&L) — the point where the bank balance stops falling.

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Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA) of the Institute of Chartered Accountants of Pakistan (ICAP), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →

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