How the break-even formula works
Every sale does two jobs. First it pays for the cost that came with it: the stock, the packaging, the card fee, the fuel to get to the job. Whatever is left is the contribution, and it goes towards the costs you carry regardless of sales, such as rent and salaries. Break-even is the point where the contributions from a month's sales add up to that month's fixed costs exactly.
Break-even units = fixed costs ÷ (price − variable cost per unit)
To get the answer in rand, divide fixed costs by the contribution margin ratio, which is the contribution as a percentage of the price. For the volume needed to make a profit, add the target profit to fixed costs before dividing. The calculator rounds the result up, because you cannot sell 0.4 of a cappuccino.
Sorting costs into fixed and variable
Getting this split right matters more than the arithmetic. A cost is variable if it rises with each extra unit or hour: stock bought for resale, raw materials, packaging, courier charges per parcel, sales commission and the percentage your card machine provider takes. A cost is fixed if you pay it whether you sell nothing or sell out: rent, permanent staff salaries with the employer's UIF contribution, insurance, your accounting fee, software subscriptions and interest on business loans.
Some costs sit in between. Electricity rises with longer trading hours but never drops to zero, and casual staff booked for Saturdays move with expected trade rather than individual sales. Put the base amount in fixed costs and the part that tracks volume into the variable cost. To price a new hire properly, the cost to company calculator shows the full monthly cost of a salary.
Worked example: a coffee shop in Stellenbosch
A small coffee shop pays R24,000 a month in rent, R31,500 for two baristas and R12,500 for insurance, its point-of-sale software, accounting and interest on an equipment loan. Fixed costs are therefore R68,000. The average sale is R42.00 excluding VAT, and beans, milk, cups, lids and the card fee come to R13.50 per sale.
Each sale contributes R28.50, a contribution margin ratio of 67.9%. Break-even is R68,000 ÷ R28.50 = 2,386 sales a month, or R100,211 of sales. Over 26 trading days, that is about 92 sales a day before the shop earns anything.
The owner expects 3,100 sales in a normal month. That leaves a margin of safety of 714 sales, or 23.0%, and a profit of R20,350. To make R30,000 a month instead, the shop needs 3,439 sales.
Break-even for a service business
Switch the calculator to services and the unit becomes a billable hour. A one-person mobile auto electrician charges R650 an hour excluding VAT and spends about R85 per hour billed on fuel and small parts. Fixed costs are R12,000 for vehicle finance interest, insurance, a phone contract and tools, plus R20,000 the owner needs to live on. Break-even is 57 billable hours a month, roughly 13.1 hours a week.
That sounds easy until you count the hours that cannot be billed: quoting, driving between jobs, buying parts and doing the books. If only half of a 45-hour week is billable, the real ceiling is about 98 hours a month, and the margin of safety is the gap between that ceiling and break-even.
VAT and the break-even point
A VAT vendor should work with VAT-exclusive figures throughout. The café's R42.00 sale is R48.30 on the till slip, but the 15% VAT belongs to SARS and is paid over on the VAT201 return. Using the VAT-inclusive price would overstate the contribution per sale and make break-even look lower than it is. If you are not registered, there is no VAT to strip out of your sales, but the VAT you pay suppliers is a real cost and belongs in your variable and fixed costs. The VAT calculator converts between the two.
Three ways to lower break-even
Raising the price usually moves break-even the furthest, because the whole increase goes to contribution. If the café adds R3 to its average sale, contribution rises to R31.50 and break-even falls from 2,386 to 2,159 sales, about 227 fewer a month. Cutting variable cost works the same way per rand saved. Cutting fixed costs lowers break-even in proportion: 10% off fixed costs means 10% fewer units. To see how a price change shows up in your margin, use the gross margin calculator or the markup calculator.
Where break-even analysis falls short
The model assumes a straight line: one price, one variable cost per unit and fixed costs that never move. Real businesses have stepped costs. A second barista, a bigger unit or another bakkie lifts fixed costs in one jump, and break-even jumps with it. Run the calculator again at the next cost level before you commit. Break-even is also a profit measure, not a cash one, so pair it with a cash flow forecast and check the full picture with the net profit calculator.
Frequently asked questions
What is the break-even formula?
Break-even units = fixed costs ÷ (selling price per unit − variable cost per unit). The amount in brackets is the contribution per unit. A café with R68,000 of monthly fixed costs and a contribution of R28.50 per sale breaks even at 2,386 sales a month.
How do I work out break-even in rand instead of units?
Divide fixed costs by the contribution margin ratio, which is the contribution per unit as a share of the selling price. In the café example that ratio is 67.9%, so break-even sales are R68,000 divided by 67.9%, about R100,211 excluding VAT. This version is handy when you sell many products at different prices.
Should my own salary be included in fixed costs?
Yes, if you need the business to pay you. Otherwise break-even only tells you when the business stops losing money while you work for nothing. In the auto electrician example, leaving out a R20,000 owner's salary drops break-even from 57 to 22 billable hours a month, which looks better than it really is.
Do I use prices including or excluding VAT?
If you are registered for VAT, use prices and costs excluding VAT, because the 15% you collect is paid over to SARS and the VAT on your purchases is claimed back. If you are not registered, use what customers actually pay you and what you actually pay suppliers, VAT included.
What is a good margin of safety?
There is no single target. The margin of safety tells you how far sales can fall before you make a loss, so a business with seasonal trade, one large customer or volatile input prices needs more room than one with steady contracted income. Track it monthly: a shrinking margin of safety is an early warning that costs are creeping up or sales are slipping.
How do I handle a business that sells many different products?
Use a weighted average. Add up a typical month of sales and variable costs across all products and divide by the number of items sold to get an average price and an average variable cost per item. If the sales mix changes, for example more low-margin items in December, the break-even point changes with it.
Is break-even the same as having enough cash?
No. Break-even is worked out on profit, and profit is not cash. Capital repayments on a loan, stock you buy ahead of a busy season and customers who pay in 60 days all take cash without changing the break-even point. Use a cash flow forecast alongside this calculator.