Break-Even Analysis Explained (With a Simple Formula)
Break-even is the point where your sales exactly cover your costs — no profit, no loss — and you find it by dividing your fixed costs by the profit you make on each sale. It's the most useful number in small business finance because it turns a vague worry ("are we going okay?") into something you can count: this many jobs, this many units, this much revenue. Here's the formula, two worked examples, and the mistakes that make most break-even numbers wrong.
Step 1: Split your costs into fixed and variable
Everything you spend money on falls into one of two buckets. Fixed costs keep coming whether you sell nothing or sell out. Variable costs only exist because you made a sale.
| Fixed (paid regardless of sales) | Variable (paid per sale) |
|---|---|
| Rent, storage, council rates | Materials, ingredients, stock |
| Insurance premiums | Packaging and freight |
| Software subscriptions, phone, internet | Card and payment processing fees |
| Accounting and bookkeeping fees | Subcontractors hired per job |
| Loan and equipment lease repayments | Sales commissions |
| Permanent staff wages and super | Casual hours rostered to demand |
| Your own pay | Fuel and consumables tied to jobs |
Two categories cause most of the trouble.
Semi-variable costs have a base plus a usage component — a phone plan with excess data, electricity with a supply charge, a delivery van with rego plus fuel. Split them: the base amount is fixed, the usage is variable.
Stepped costs look fixed until you hit a ceiling. One oven, one van, one part-timer covers you up to a point, then you have to buy a second one and your fixed costs jump. Break-even is only valid inside the step you're currently standing on.
Step 2: Work out your contribution margin
Contribution margin is what's left from one sale after you pay the variable costs of making it. It's the money that "contributes" to covering your fixed costs — and once those are covered, everything after that is profit.
Contribution margin per unit = selling price (excluding GST) − variable cost per unit
Express it as a percentage of the price and you get the contribution margin ratio, which lets you work in dollars instead of units. That's useful when you sell lots of different things at different prices.
Step 3: Apply the formula
| What you want to know | Formula |
|---|---|
| Contribution margin per unit | Price ex GST − variable cost per unit |
| Contribution margin ratio | Contribution margin ÷ price ex GST |
| Break-even in units | Fixed costs ÷ contribution margin per unit |
| Break-even in revenue | Fixed costs ÷ contribution margin ratio |
| Units needed for a target profit | (Fixed costs + target profit) ÷ contribution margin per unit |
That's the whole thing. The maths is trivial; the work is in getting honest cost numbers.
Worked example: a service business
Dan is a sole trader mobile mechanic. His average job bills at $340 excluding GST.
| Fixed cost (per month) | Amount |
|---|---|
| Van lease, rego and insurance | $1,180 |
| Public liability and tool cover | $170 |
| Phone, internet, job management software | $200 |
| Accounting and bookkeeping | $250 |
| Marketing | $400 |
| His own pay | $6,000 |
| Voluntary super for himself (12%) | $720 |
| Total fixed costs | $8,920 |
Sole traders don't have to pay themselves super, but Dan does — $8,640 a year, comfortably inside the $32,500 concessional cap (as at September 2026). Either way, both his pay and his super are costs the business has to earn.
| Variable cost per job | Amount |
|---|---|
| Parts and consumables | $95 |
| Fuel | $18 |
| Card processing | $5 |
| Total variable cost | $118 |
Contribution margin: $340 − $118 = $222 per job (65% of the price).
Break-even: $8,920 ÷ $222 = 40.2 jobs, so 41 jobs a month. You can't sell four-fifths of a job, so always round up. That's $13,940 of work a month, or just under 10 jobs a week.
Want $2,000 of actual profit on top of his $6,000 pay? ($8,920 + $2,000) ÷ $222 = 49.2, so 50 jobs a month. Nine more jobs — roughly two extra a week.
Worked example: a product business
Mia sells a candle online for $49 including GST. She's registered for GST, so the first move is stripping it out: $49 ÷ 1.1 = $44.55 ex GST. That $4.45 was never hers.
| Per candle | Amount |
|---|---|
| Price ex GST | $44.55 |
| Wax, wick, fragrance, jar | $11.20 |
| Label and box | $1.80 |
| Satchel and freight | $9.50 |
| Payment processing | $1.16 |
| Variable cost | $23.66 |
| Contribution margin | $20.89 (46.9%) |
Her fixed costs — studio rent $900, insurance $95, website and apps $180, accounting $180, a set advertising budget of $1,200, her own pay $4,500 and 12% super on it of $540 — total $7,595 a month.
Break-even: $7,595 ÷ $20.89 = 363.6, so 364 candles a month. That's $17,836 through the checkout including GST, or about $16,215 ex GST. Roughly 12 candles a day, every day.
Using break-even to make decisions
This is where the number earns its keep. Recalculate it every time something changes and the answer stops being a debate.
A price change
If Dan lifts his average job to $357 — a 5% rise — his contribution margin becomes $239 and break-even falls to $8,920 ÷ $239 = 37.3, so 38 jobs. Three fewer jobs a month for exactly the same take-home.
Now run it the other way. A 10% discount drops the job to $306, contribution margin to $188, and break-even climbs to 47.4 — 48 jobs. Seven extra jobs a month, 17% more work, just to stand still. Our pricing strategy guide has the full table of how much volume a discount has to replace at each margin level.
A hiring decision
Mia is thinking about a casual packer for 15 hours a week. At the casual national minimum of $33.05 an hour (as at September 2026) that's $495.75 a week, about $2,148 a month, plus 12% super of $258 — call it $2,406 a month, before workers compensation premiums and the time she spends supervising.
Her fixed costs go to $10,001, and break-even moves from 364 to 479 candles a month. She needs to sell about 115 more candles a month — roughly 27 a week — before the hire pays for itself.
That's a concrete question she can answer: can the freed-up hours generate 27 extra sales a week? Check the correct modern award before you set a rate, though — the national minimum is the absolute floor and most roles sit under an award that pays more. Our first employee checklist covers the rest.
Margin of safety: how much room you've actually got
Break-even tells you the line. Margin of safety tells you how far above it you're standing.
Margin of safety = (current sales − break-even sales) ÷ current sales
Dan is doing 52 jobs a month against a break-even of 41. That's 11 jobs of headroom, or a margin of safety of 21%. His sales could drop by a fifth before he's working for nothing. (His actual profit: 52 × $222 = $11,544 of contribution, less $8,920 of fixed costs = $2,624 a month on top of his own pay.)
Below about 20%, most owners start feeling it — one lost commercial client, one wet fortnight, one competitor opening nearby and you're under water. It's a far better early-warning number than revenue growth.
Five mistakes that make break-even numbers useless
Forgetting to pay yourself. If your own drawings aren't in fixed costs, you've calculated the point where the business survives and you don't get paid. Include your wage and your super.
Using GST-inclusive figures. If you're registered, work entirely ex GST on both sides. Mixing GST-inclusive revenue with GST-exclusive costs overstates your margin by about 10%.
Ignoring seasonality. Dan's annual fixed costs are $107,040, which works out to about 483 jobs a year. But a mechanic's January is dead and his pre-holiday November is chaos — a flat monthly average hides the months where he's burning cash. Run break-even monthly, then check it against a cash flow forecast.
Treating stepped costs as permanent. The moment you sign a bigger lease, add a second van or take on staff, your fixed costs jump and every number above is stale. Redo it the same day.
Confusing break-even with cash flow. Break-even is a profit measure. You can be well above break-even and still unable to pay a supplier because your customers are 60 days late. Profit and cash are different problems — our guide to reading a P&L explains why.
If you'd rather not do this in a spreadsheet, the free business plan builder works out your break-even point from your cost and pricing figures as you fill it in.
Key takeaways
- Break-even = fixed costs ÷ contribution margin per unit. Contribution margin = price ex GST minus variable cost per unit.
- Split every cost into fixed or variable first; semi-variable costs get split into their fixed base and their usage component, and stepped costs reset the whole calculation.
- Your own pay belongs in fixed costs. A break-even that assumes you work for free isn't a break-even.
- Use GST-exclusive figures throughout if you're registered for GST.
- Recalculate before any price change, any hire, any new lease — it turns opinions into a countable target.
- Track your margin of safety, not just your revenue. Under about 20% headroom, one bad month hurts.
Where to get help
- business.gov.au — free business plan and financial templates, plus guides on costing and pricing.
- Your state small business agency — Business Victoria publishes a break-even, margin and markup guide, and Business Queensland offers a downloadable break-even and minimum sales template. Both work anywhere in Australia.
- ATO small business benchmarks — free industry ranges for cost of sales, labour and rent as a share of turnover, drawn from real tax returns across more than 100 industries. Useful for sanity-checking your variable cost assumptions.
- Your accountant or a registered BAS agent — worth an hour of their time to check your fixed/variable split and confirm you're working ex GST, especially before a hire or a price rise.
- Your accounting software — Xero, MYOB and QuickBooks can all export the cost breakdown you need; the hard part is classifying it, not finding it.
Frequently asked questions
How do you calculate your break-even point?
Divide your fixed costs by your contribution margin — the selling price of one unit minus the variable cost of producing it. If your fixed costs are $8,920 a month and you make $222 on each job, you break even at 8,920 ÷ 222 = 40.2 jobs, so 41 jobs a month. To get break-even in dollars instead, divide fixed costs by your contribution margin as a percentage of price.
What's the difference between fixed and variable costs?
Fixed costs are the ones you pay whether or not you sell anything — rent, insurance, software, loan repayments, permanent wages. Variable costs only happen when you make a sale — materials, freight, packaging, card fees, subcontract labour. The split isn't always obvious, and getting it wrong is the fastest way to a useless break-even number.
Should break-even be calculated including or excluding GST?
Always use GST-exclusive figures if you're registered for GST. The GST you collect was never yours — it's the ATO's money passing through your account — so including it inflates your revenue by 10% and makes you look profitable when you aren't. Registration is compulsory once your GST turnover reaches $75,000.
Do I include my own wage in a break-even calculation?
Yes. If you're a sole trader or a company director taking drawings, your own pay is a real cost of running the business and belongs in your fixed costs. Leaving it out is the single most common break-even mistake — it produces a target you can hit while still earning nothing for your own time.
What is a good margin of safety?
There's no official benchmark, but most owners get uncomfortable below about 20% — that's the point where one lost contract or one quiet month tips you into a loss. Margin of safety is your current sales minus your break-even sales, expressed as a percentage of current sales.
General information only. This guide doesn't take your personal or business circumstances into account and isn't financial, legal or tax advice. Rates and thresholds change — check the official sources linked in this guide and get qualified advice where your circumstances require it.