Break-even for startups: what is it and how to calculate it

Updated: Feb 2

One of your first goals as an entrepreneur is to start getting profits as soon as possible. To achieve this, you need to create a financial plan, taking into consideration the steps that you will follow before achieving the break-even point.


⚖️ What is break-even analysis?

Break even analysis refers to the point in which total cost and total revenue are equal. This type of analysis is used to determine the number of units or income you need to cover the total cost (fixed and variable cost).

Revenue = Cost

As illustrated in the graph above, the point at which total fixed and variable costs are equal to total revenues is known as the break even point. At the break even point, a business does not make a profit or loss.


🧮 The Formula

One of the quickest ways to understand if your startup is going to be viable or not is by calculating the break-even point.

  • First, you need to consider the total expenses you will need to cover:

a) all the fixed cost (for example, those related with the salaries, office, etc) and

b) variable cost your business will have (those that are linked to the sales, such as the raw material or commissions from the payment platforms).

  • Then determine the sales price per unit;

  • Next, calculate your Contribution Margin (Ratio): Contribution Margin = Sales price per unitVariable costs per unit Contribution Margin Ratio = Contribution Margin ÷ Sales price per unit

Finally, to calculate the break-even point:

a) in units, we use the formula:

Break-Even point (units) = Fixed Costs ÷ Contribution Margin

b) in sales dollars, we use the formula:

Break-Even point (sales dollar) = Fixed cost ÷ Contribution Margin Ratio

📌 An example

Let's say we are releasing a new toy to the market, its costs and pricing are shown below:


  • Fixed cost: 3,000 dollars

  • Total unit sold: 500 pieces

  • Sale price per unit: 25 dollars

  • Variable costs per unit: 20 dollars

  • Contribution margin: 25 - 20 = 5 dollars

  • Contribution margin ratio: 5 ÷ 25 = 0.2


Then:

Break-Even point (units): 3,000 ÷ (25 - 20) = 600 units

or

Break-Even point (sales dollar): 3,000 ÷ [(25 - 20) ÷ 25]= 15,000 dollars


To sum up, we must sell 600 units, or achieve sales worth 15,000 dollars to obtain as much revenue as the cost.


As we only have sold 500 units, the business has not achieved break-even point. Simply put, the business is losing money.


🔧 How to use a break-even analysis

We can use a break-even analysis to determine the break-even point for a business. However, we do not stop from here.


Once the analysis is done, you might realise that you have to sell a lot more products before you can reach break-even.


Then, you might have to review on whether your current plan is realistic: should you raise sales price per unit, or reduce some costs, or do both.


🚀 Break-even for startups

Unlike established business, which usually has historical data to refer to, a new business does its break-even analysis by creating an annual forecasting that includes estimated costs and projected revenue. The accuracy is inevitably always a challenge here.


Plus, the time span within which a break-even will be achieved is also a frequently asked question by the startup owner themselves, and the investors of course. The math is a bit more complicated than what we have seen in the previous paragraphs.


The good news is that when it comes to numbers, Faicliq financial planning tool is designed to make entrepreneurs’ life easier, in a number of ways:

a) improving the accuracy of the forecasting by providing users with a full list of costs considered. Don't worry if you are a newbie in the business world, we make sure no cost categories to be overlooked.


b) generating a break-even analysis automatically after a few clicks and inputs. Time is previous for entrepreneurs, you shouldn't be wasting time on searching for the best formula to calculate your financial projection, leave that nuisance to us.


c) visualising the results for a clearer picture of projected financial situation. We understand numbers can be confusing, especially when they are all squeezing in small units in a table. Graphs are much more visual friendly.


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