Create a Break-Even Analysis for Your Business - BusinessTown

Your business starts here.

100+ courses. $5.95/month. Cancel anytime.

Create a Break-Even Analysis for Your Business

What is a Break-Even Analysis?

A break-even analysis is the sales level that is required for your business to operate without incurring a financial loss. It is important to determine this point, as the viability of your business is reliant on staying above this number.

break-even analysis
A break-even analysis is used to determine the point at which your business can operate without incurring a loss.

A Sample Break-Even Analysis

Let’s take a look at Sam’s Beach Umbrella Store, a retail hut that sells beach umbrellas. Sam buys his umbrellas from the manufacturer for $10 and sells them for $20, making a gross profit of $10 on each umbrella.

Gross Profit Formula

Sales Price / Cost of Goods Sold = Gross Profit
$20 / $10 = $10 per umbrella

Gross profit is the profit he makes after subtracting the costs of the item that he is selling, excluding general expenses of running the business. So, in Sam’s case, the direct cost is the $10 he pays per umbrella to the manufacturer. The indirect costs or overhead costs would be the costs of running the store. So, his direct cost of buying the umbrella will fluctuate based on how many umbrellas he sells, whereas his indirect costs will remain fixed. The costs of buying umbrellas are variable costs.

Sam is the only employee and pays himself no salary. Sam figures he doesn’t need to advertise because his retail hut is located across the street from a busy beach. Sam’s only expense is his rent of $2,000 per month, which also includes the electricity to power the one light bulb in his hut. Sam only takes cash for sales.

Related: Using Income Statements, Balance Sheets, Cash Flows, and Pro Formas to Drive Profitability

Sam determines his break-even cost by starting with his fixed cost of $2,000 per month. Then he divides that by the gross profit of $10 that he makes on the sale of each umbrella. So, his break-even in terms of unit sales is $2,000 divided by $10, or 200 umbrellas per month.

Break-Even Formula

Fixed Cost / Gross Profit per Unit = Break-Even in Units
$2,000 / $10 = 200 Units (Umbrellas)

Since break-even is often thought of in terms of units of items sold, his sales break-even would be 200 umbrellas. He could also think of his break-even in terms of total sales: 200 umbrellas multiplied by $20, which would be $4,000.

Break-Even Formula in Sales $

(Fixed Cost / Gross Profit per Unit) x Sales Price per Unit =
Break Even Sales $
($2,000 / $10) x ($20) = $4,000

If Sam’s sales are fewer than 200 umbrellas (or $4,000) per month, he is losing money—he would lose $10 for every umbrella sold. But, if his sales are greater than $4,000 per month, he is making a profit—$10 for every 200+ umbrellas that he sells each month.

A Break-Even Analysis Is A Reality Check for Your Business

A break-even analysis helps you determine whether your overhead is realistic or needs to be reduced. Maybe for Sam’s Beach Umbrella Store it is impossible to sell more than 190 umbrellas in a month. If that is the case, then the fixed cost of $2,000 per month is too high for his business model and Sam needs to make some changes—negotiate a lower rent, add an additional product line, or move to a new beach!

Break-even analysis
What does cash flow have to do with a break-even analysis?

Cash Flow Versus Break-Even

Note that this break-even analysis has nothing to do with cash flow. Let’s say Sam buys 300 umbrellas every single month, generating $6,000 in sales (300 x $20), $3,000 in gross profit (300 x $10), and $1,000 in pretax profit ($3,000 – $2,000 fixed costs). However, one month the manufacturer offers Sam a deal: if he buys 2,000 umbrellas at once, he will get a special price of $9 each. The manufacturer will also give Sam 60 days to pay the bill.

To Sam, being a simple guy, this sounds like a great idea. By buying umbrellas at just $9 each his gross profit on each umbrella jumps 10 percent to $11 ($20 minus $9 cost). Furthermore, his break-even is reduced in unit terms to (2,000/11, or 182). Sam is excited and can’t wait for his higher level of profits to roll in!

Related: How to Create a Pro Forma Cash Flow for Your Small Business

For the next couple of months, Sam continues to sell 300 umbrellas per month. He feels great about his lower costs, and that he is making a much higher profit. With his sales of $6,000 (300 x $20), his gross profit is now $3,300 (300 x $11), and his net profit is $1,300 ($3,300 less $2,000 fixed costs). So, while his gross profit on each sale has increased 10 percent, his net income each month after fixed expenses has surged 30 percent!

However, in 60 days, Sam has a problem. The bill for the 2,000 umbrellas is due and he doesn’t have enough money to pay for it. He still has lots of extra umbrellas, but it will be many months until his business sells them to satisfy demand.

Unless Sam can quickly sell the umbrellas, or get a loan, or dip into his savings, he will have to default on the payment for the large umbrella order.

This example is a lesson in the importance of projecting your cash flow needs as well!

How to Create a Pro Forma Income Statement

Bob Adams

Bob Adams is the founder of BusinessTown the go-to learning platform for people starting and running their own businesses. Bob has started dozens of successful businesses, including one he launched with $1500 and sold for $40 million. He also has an MBA from Harvard Business School.

Your business starts here.

We will take you step-by-step through every aspect of starting a business.
100+ courses. $5.95/month. Cancel anytime.

Watch our videos to learn how to start a successful business.

Watch Our Videos

Learn from experienced experts
and successful entrepreneurs.

Why be alone on your business adventure? Let Bob Adams, a Harvard MBA and multimillionaire, and his team of highly skilled experts, guide you on your journey to business success.

Bob has founded over a dozen successful businesses and written 16 business books. He has been featured on TV shows including NBC’s Today, The 700 Club and Oprah! Bob has helped millions of entrepreneurs get started with their own businesses.

Bob Adams books and courses have been featured in:

What entrepreneurs are saying about BusinessTown:

“You so inspired me that I started a business and have started receiving orders. Your lecture series about how to pick a business to start really got me going after I followed your steps to a tee. Thanks so much!” Bill Bennett, Business Owner
“I found great value in the BusinessTown courses. The program is comprehensive, covering everything…It’s like having a team of experienced advisors available 24 x 7.” Dan Sterling, Founder of Water Hero
“Having run across your videos was a godsend to me. Your method provides me the structure I need to be successful. I am willing to put in the work to go through your complete course which so far has been incredibly helpful.” Phyllis Marks, Starting an Online Business
“I have researched the marketplace for over a month to identify a viable and comprehensive ‘go to’ guide on how to best launch a small business. This course offering from Bob Adams met more than what I was looking for.” Steve Cox, Experienced Businessperson
“Bob has been a trusted business adviser of mine for years… guiding me through the challenges we all face as entrepreneurs. Hands down Bob is one of the most talented, and successful entrepreneurs I know.” Matt Marshall, Founder of MGM Capital Investments


  • Unlimited access to all of BusinessTown.
  • All courses. All tools. Discussion Board.
  • Cancel within 7 days and you will not be charged.
  • We’ll remind you by email 2 days before your free trial ends.

Get on your road to success with BusinessTown. It’s as easy as 1-2-3.

1. Begin your free trial.

Click here to begin your free 7-day trial. Membership is $5.95/month after the free trial. Cancel anytime. We will remind you by email 2 days before the free trial ends.

2. Enjoy immediate access.

Get instant access to all 100+ courses, 50+ tools (worksheets, etc.) and our discussion board. You will learn step-by-step how to start, run and grow a business.

3. Succeed in business.

You will have everything you need to start and grow your business. You will become a smart, confident, and successful entrepreneur, who makes the right decisions.