Every small business owner carries a rough version of one number in their head. It is the answer to the question of how much the business needs to bring in before it starts making real money. Ask where that figure came from and the answer is usually a shrug and a phrase like “about thirty grand a month”. It might be right. It might be thousands of pounds off. And the difference between the two is whether a quiet month is merely uncomfortable or genuinely dangerous.
Learning how to do a break even analysis for a small business replaces that shrug with arithmetic. It tells you exactly how many sales it takes to cover every bill before a single pound of profit appears. More usefully, it shows you what happens to that line when you raise your prices, offer a discount, sign a bigger lease or take on a new member of staff.
This guide walks you through the process in plain English with UK examples, a simple worked example and the common traps to avoid. No finance degree required.
What a break even analysis actually tells you
A break even analysis finds the point where your total sales exactly match your total costs. At that point you are making neither a profit nor a loss. Sell less than the break even amount and you are losing money on the business as a whole. Sell more and you are profitable.
It does not tell you whether your business idea is good, whether your pricing is sensible or whether customers will keep coming back. It answers one narrow question brilliantly: how much do I need to sell to cover my costs. That single number is the foundation for setting sales targets, testing price changes and deciding whether you can afford to grow.
The break even formula in plain English
There are two versions of the formula and both use the same building blocks.
Break even point in units: fixed costs divided by the contribution margin per sale
Break even point in revenue: fixed costs divided by the contribution margin ratio
If those terms look intimidating, do not worry. You will understand every piece of them by the end of this article. The whole exercise takes about an hour the first time you do it and twenty minutes once you have your numbers to hand.
Step one: split your costs into fixed and variable
This is the foundation of the entire analysis and the step most people get wrong. Go through your last three months of spending and sort every cost into one of two buckets.
Fixed costs to list first
Fixed costs are the bills you pay whether you sell one unit or a thousand. Rent or lease payments, business rates, insurance, salaries, software subscriptions, accountancy fees and loan repayments all sit here. For a typical UK small business, this bucket might include £2,500 a month for premises, £1,800 in wages, £300 in insurance and utilities and £200 in subscriptions and accountancy. That totals £4,800 a month.
Be honest about this list. Many owners forget the costs they pay annually, such as public liability insurance or the business rates bill, and leave them out of the monthly picture. Divide any annual cost by twelve and include your share of it in the monthly total.
Variable costs that move with each sale
Variable costs change with every sale you make. If you sell nothing, these costs are zero. Raw materials, packaging, card payment processing fees, delivery charges and any commission you pay per sale belong here. A coffee shop spends money on milk, cups and beans with every drink served. A freelance designer spends almost nothing extra per project beyond perhaps a stock photo licence.
One cost confuses nearly everyone at this stage: your own wages. If you pay yourself a fixed salary, that is a fixed cost. If you draw money only when there is profit, leave it out of the break even calculation but remember that the analysis is then showing you the point where the business breaks even, not where you get paid.
Step two: work out your contribution margin per sale
Your contribution margin is simply what is left from each sale after you subtract the variable cost of making that sale. This is the amount each sale contributes towards covering your fixed costs and eventually towards profit.
Take your average selling price and subtract your average variable cost per sale. If a Manchester coffee shop sells a latte for £4.20 and the milk, cup, lid and beans for that drink cost £0.90, the contribution margin is £3.30 per cup. Every latte sold chips £3.30 off the monthly fixed costs.
If you sell services rather than products, the same logic applies. A gardener who charges £180 a day and spends £25 on fuel, waste disposal and materials has a contribution margin of £155 per day. Keep the numbers realistic and use your actual costs, not the costs you wish you had.
Step three: divide fixed costs by the contribution margin
Now the arithmetic. Divide your monthly fixed costs by the contribution margin per sale. Using the coffee shop numbers:
£4,800 in fixed costs divided by £3.30 contribution margin per cup equals 1,455 cups per month.
That is your break even point in units. Selling 1,455 lattes in a month covers every bill and leaves exactly zero profit. Cup 1,456 is where the profit begins.
To express the same answer in revenue, use the contribution margin ratio instead. Divide the contribution margin by the selling price: £3.30 divided by £4.20 equals 0.79, or 79 percent. Then divide fixed costs by that ratio: £4,800 divided by £0.79 equals £6,076. The coffee shop needs just over £6,000 a month in sales to break even.
For service businesses, the unit version is usually the more useful one. Knowing you need 21 billable days a month to cover your costs is a concrete target you can plan around.
A worked example: a Leeds candle business
Let us put the whole method together with a second example so you can see it working for a product business that sells online.
Sophie makes candles in her Leeds workshop and sells them through her website and at weekend markets. Her fixed costs are £1,200 a month: £600 for the workshop unit, £250 for storage and utilities, £200 for insurance and software, and £150 for accountancy and a phone contract. Each candle sells for £14. The wax, fragrance, container and packaging cost £3.80 per candle, and card processing plus postage averaged over each order add roughly £1.20. Her variable cost per candle is therefore £5.00 and her contribution margin is £9.00.
| Figure | Calculation | Amount |
|---|---|---|
| Monthly fixed costs | Rent plus bills plus fees | £1,200 |
| Selling price per candle | Average order price | £14.00 |
| Variable cost per candle | Materials plus fees plus postage | £5.00 |
| Contribution margin | £14 minus £5 | £9.00 |
| Break even in units | £1,200 divided by £9 | 134 candles |
| Break even in revenue | 134 times £14 | £1,876 |
Sophie needs to sell 134 candles a month to cover her costs. That is about 34 candles a week, or fewer than five a day. Seeing the number written down often changes how an owner thinks. Some discover their target is surprisingly small, which is motivating. Others discover it is uncomfortably large, which is valuable information before they sign a longer lease.
How to run the analysis for a service business
If you sell your time, swap units for days, jobs or clients. A plumber in Bristol with £3,600 of monthly fixed costs who earns £250 per day after parts and fuel has a break even point of 15 working days a month. A bookkeeper charging £45 an hour with £1,800 of monthly costs and £5 an hour of software and travel costs needs 45 billable hours a month.
The tricky part for services is utilisation. You might be able to work 22 days a month, but if only 12 of those are billable the rest do not count. Base the calculation on billable time only. If your break even point requires more billable hours than you can realistically sell, you have found a pricing or cost problem early, which is exactly what this analysis is for. Calculating your freelance day rate properly feeds straight into these numbers.
Three what if tests worth running before a big decision
The real power of a break even analysis is not the first number you calculate. It is how easily you can test decisions before you spend money on them.
What if I raise my prices? If Sophie raises her candle price from £14 to £16 while costs stay at £5, her contribution margin becomes £11 and her break even point drops from 134 candles to 109. A modest price rise can move the break even line dramatically because the entire increase flows to the margin.
What if I take on extra costs? If the coffee shop signs a bigger lease that adds £600 a month to fixed costs, the break even point rises from 1,455 cups to 1,637 cups. That is an extra 182 cups a month, or about six a day, that the busier location must generate just to stand still.
What if variable costs rise? If milk prices push the coffee shop’s variable cost from £0.90 to £1.20 a cup, the contribution margin shrinks to £3.00 and the break even point climbs from 1,455 to 1,600 cups. This is why cost inflation hurts small businesses: it moves the target you are chasing while you stand still.
What to do if your break even point looks too high
A high break even point is not a verdict on your business. It is a diagnosis that points at specific levers you can pull.
First, look at your fixed costs with fresh eyes. Are there subscriptions you no longer use, insurance you could renegotiate or space you could sublet on quiet days. Cutting £300 a month from fixed costs lowers the coffee shop’s break even point by about 91 cups.
Second, examine your pricing. Most small businesses underprice, especially in the first two years. Even a five percent price rise can make a meaningful difference because, as the what if test showed, the extra revenue drops straight to your margin. Managing cash flow during slow months becomes much easier when your break even point sits comfortably below your typical sales.
Third, attack your variable costs. Renegotiate with suppliers, buy materials in larger quantities if cash flow allows or switch card payment providers. Shaving twenty pence off the cost of each cup lowers the break even point by nearly a hundred cups a month.
The mistakes that make break even analyses misleading
The maths is simple, which makes it tempting to trust the answer too much. Five assumptions sit underneath every break even calculation and knowing them keeps the number in perspective.
Costs are rarely fixed forever. The analysis assumes your fixed costs stay flat as you grow. In reality, crossing certain thresholds forces step changes: a second employee, a bigger van, a larger unit. Treat the result as valid for your current scale, not for every future size.
You probably sell more than one thing. If you sell lattes, sandwiches and merchandise, each has a different contribution margin. The single product formula still works if you use a blended average, but recalculate whenever your sales mix shifts. A month heavy on low margin sandwiches has a higher break even point than a month heavy on high margin coffee.
The analysis ignores time. It tells you how much to sell but not how quickly cash arrives. A business that breaks even on paper can still run out of cash if customers pay in sixty days while suppliers want payment in thirty. Run a separate cash flow view alongside this one.
Seasonality changes everything. A garden centre breaks even easily in May and struggles in January. If your trade is seasonal, calculate a separate break even point for peak and off peak months rather than trusting a yearly average.
It assumes you sell what you make. The calculation counts units sold, not units produced. Unsold stock still cost you money but contributes nothing to the margin. This is where regular stock checks matter, because the true variable cost per sale is higher than the recipe cost when waste is included.
How often to redo the analysis
Do it properly once, then treat it as a living number rather than a one time exercise. Review it every quarter as a minimum, and always recalculate when something material changes: a rent review, a price rise, a new supplier contract, a new hire or a new product line.
Keep the working in a simple spreadsheet so the review takes minutes rather than hours. One tab for fixed costs, one for variable costs, one for the calculation. When energy prices move or card fees change, update the single cell and watch the break even point move. Running a SWOT analysis for your small business once a year pairs well with this quarterly rhythm, giving you both the numbers and the strategy view.
How to do a break even analysis for a small business in a spreadsheet
You do not need special software. A simple spreadsheet with three tabs does the job and makes quarterly reviews quick. On the first tab list every fixed cost with its monthly amount and a total at the bottom. On the second tab list your products or services with selling price, variable cost per sale and contribution margin in columns. On the third tab put the two formulas: fixed costs divided by contribution margin for units, and fixed costs divided by the contribution margin ratio for revenue.
When a bill changes or you adjust a price, update the relevant cell and the break even point recalculates instantly. Seeing the number move in response to real decisions is what turns this from a one off exercise into a habit. Google Sheets and Excel both work fine, and the file is easy to share with an accountant or business partner.
Conclusion: know your number
A break even analysis will not run your business for you, but it gives you the one number every other decision hangs on. Work through the three steps: split your costs into fixed and variable, calculate your contribution margin per sale and divide the first by the second. Then stress test the result with a few what if scenarios before any big commitment.
The key takeaways are simple. Base the calculation on honest, complete costs including annual bills split monthly. Use your real variable costs, not optimistic ones. Remember the assumptions, especially if you sell multiple products or trade seasonally. And once you know how to do a break even analysis for a small business, revisit the number every quarter, because a break even point that moves with your business is one of the most useful figures you will ever track.
Frequently asked questions
What is a break even analysis in simple terms?
It is a calculation that finds the sales level where your business covers all its costs exactly, with zero profit and zero loss. Everything sold beyond that point contributes to profit.
What figures do I need to do a break even analysis?
You need your total monthly fixed costs, your average selling price and your average variable cost per sale. Those three numbers are enough to calculate the break even point in both units and revenue.
Can I do a break even analysis for a service business?
Yes. Replace units with billable days, jobs or hours. Divide your monthly fixed costs by your contribution margin per billable unit to find how much billable time you need to cover your costs.
What is a good break even point for a small business?
There is no universal good number. What matters is how your break even point compares with your actual and realistic sales. If it sits comfortably below your normal monthly sales, you have a healthy cushion. If it sits above them, you need to cut costs, raise prices or both.
How is a break even analysis different from a cash flow forecast?
A break even analysis shows the sales level needed to cover costs, while a cash flow forecast shows when money actually moves in and out of your account. A business can be above break even on paper yet still run out of cash if customers pay slowly, so use both together.
