Is the break-even point the same as the payback period?

No. The break-even point is a level of sales per period at which profit is zero. The payback period is the time it takes to earn back an investment.

Should loan repayments be included?

For the question of whether the business covers its cash commitments, include them as fixed. Accountants separate interest, which is a cost, from repayment of the principal, which is not, so be clear which view you are using.

How do I handle a business with many products?

Use the revenue version of the formula with the average variable cost ratio across your sales mix. If the mix changes a lot, the break-even point changes with it.

Is a salary with bonuses fixed or variable?

Mixed: the base salary is fixed, the bonus per sale or per order is variable. Split it accordingly.

How often should I recalculate?

At least quarterly, and every time rent, prices, staffing or suppliers change noticeably.

How to calculate a break-even point for a small business: fixed, variable and mixed costs

What the break-even point is

The break-even point is the level of sales at which revenue exactly covers all costs, so profit is zero. Below it the business loses money, above it every additional sale adds profit. It can be expressed as revenue for a period or as a number of units or orders.

The calculation rests on one idea: costs behave differently when sales change. Some stay the same, some grow with every sale. Sorting costs by behaviour is therefore most of the work, and the formula itself is short.

Fixed, variable and mixed costs

Fixed costs have to be paid regardless of turnover within a period: rent, salaries with a fixed amount, insurance, software subscriptions, loan repayments of a fixed size.
Variable costs grow with sales: the cost of goods sold, materials, packaging, sales commissions, card and marketplace fees charged per transaction, delivery per order.
Mixed costs have both parts: electricity with a standing charge plus consumption, a phone contract with a base fee plus usage, a salary with a fixed part plus a bonus per sale.

Fixed does not mean forever. Rent is fixed for this month but can change next year, and a second shop brings a new level of fixed costs. The classification is valid for a range of activity and a period, which is why the calculation should be repeated when the business changes.

The formulas

Contribution margin per unit = price − variable cost per unit.
Contribution margin ratio = contribution margin ÷ revenue, or 1 − variable costs as a share of revenue.
Break-even revenue = fixed costs ÷ contribution margin ratio.
Break-even units = fixed costs ÷ contribution margin per unit.
Revenue for a target profit = (fixed costs + target profit) ÷ contribution margin ratio.
Margin of safety = (current revenue − break-even revenue) ÷ current revenue.

For a shop or a service company with many products, the revenue version is usually more practical, because it uses an average variable cost ratio instead of a single unit price.

How to calculate it step by step

Choose the period, usually a month, and take actual figures from recent months rather than a single unusual one.
List every cost category and mark it as fixed, variable or mixed.
Split each mixed cost into a fixed and a variable part, from the contract terms or with the high-low method described below.
Add up the fixed costs, including the fixed parts of mixed costs.
Express variable costs as a share of revenue, including the variable parts of mixed costs.
Calculate the contribution margin ratio: 1 − the variable share.
Divide the fixed costs by the contribution margin ratio to get the break-even revenue.
Compare it with your current revenue to get the margin of safety, and repeat the calculation whenever prices, rent or staffing change.

Splitting a mixed cost with the high-low method

Take the month with the highest activity and the month with the lowest. The difference in cost divided by the difference in activity gives the variable rate. Subtract the variable part from either month's cost and what remains is the fixed part. The method uses only two points, so check that neither month was unusual. If the contract states the base fee, use that instead.

Worked example (illustrative numbers)

A small shop has these monthly costs:

Fixed: rent 3,000 EUR, salaries 7,500 EUR, subscriptions and insurance 1,500 EUR, together 12,000 EUR.
Variable: cost of goods, card fees and packaging together take 40% of revenue.
Mixed: electricity. In a month with 20,000 EUR revenue it was 700 EUR, in a month with 40,000 EUR revenue 1,100 EUR.

High-low for electricity: the cost rose by 400 EUR while revenue rose by 20,000 EUR, so the variable part is 2% of revenue. The fixed part is 700 − 2% × 20,000 = 300 EUR.

Fixed costs are now 12,000 + 300 = 12,300 EUR. Variable costs are 40% + 2% = 42% of revenue, so the contribution margin ratio is 58%. Break-even revenue is 12,300 ÷ 0.58 ≈ 21,207 EUR a month. With an average receipt of 25 EUR that is about 849 sales.

If current revenue is 30,000 EUR, the margin of safety is (30,000 − 21,207) ÷ 30,000 ≈ 29%: sales could fall by almost a third before the shop starts losing money. To earn a profit of 2,000 EUR a month, the shop needs (12,300 + 2,000) ÷ 0.58 ≈ 24,655 EUR.

Had the owner simply ignored electricity, the break-even point would have been 12,000 ÷ 0.60 = 20,000 EUR, about 1,200 EUR too optimistic every month.

How it works in OrgLines

In the OrgLines finance module each income and expense category is marked as fixed, variable or mixed, and that mark is input, not decoration: fixed costs make up the numerator of the break-even calculation and variable costs set its slope. The classification belongs to the category, so correcting it once fixes every budget and break-even calculation that reads it, and it can be overridden on any line.

The system does not guess where the line runs inside a mixed cost. It asks you to split it, and until you do, the break-even point is shown as approximate and calculated without that cost. If expenses are in several currencies and there is no exchange rate for the date the period closes, OrgLines shows a dash instead of a number and tells you to add the rate. Without any revenue there is no ratio to calculate, so the point appears once the first income is recorded.

To test a decision, a what-if scenario such as a 20% drop in sales or higher rent is an overlay on the forecast and does not touch real invoices, payments or budgets. You can also ask the AI assistant for the break-even point.

Common mistakes

Treating all costs as fixed or all as variable because sorting them takes time.
Leaving mixed costs unsplit, or quietly counting them as fully fixed.
Using the markup instead of the contribution margin: a 40% markup is not a 40% margin.
Forgetting per-transaction costs such as card fees, marketplace commissions or delivery.
Using one exceptional month as the basis.
Leaving out the owner's own pay, which makes the business look healthier than it is.
Calculating once and never again after rent, prices or staff change.

Checklist

Every cost category is marked fixed, variable or mixed.
Mixed costs are split, and the method is written down.
The variable share includes fees and commissions per sale.
Fixed costs include salaries, owner's pay and loan repayments.
Figures come from several normal months, not one.
The margin of safety is calculated against current revenue.
The next review is scheduled, for example quarterly.

Try it free in OrgLines