Most business owners can tell you roughly what their costs are. Far fewer can answer this quickly: how much do you need to sell next month to avoid losing money?
That figure is your break-even point, and it is worth knowing reasonably accurately.
How to calculate it
Fixed costs ÷ gross margin % = break-even sales
Fixed costs are the ones that do not change directly with sales — rent, salaries, software, insurance, accountancy. Your gross margin is what is left out of every pound of sales after the direct costs of delivering the work.
A worked example
Fixed costs: £6,000 a month
Gross margin: 40%, so every £1 of sales leaves 40p after direct costs
Break-even sales: £6,000 ÷ 40% = £15,000 a month
Below £15,000 of sales, the business makes a loss. Above it, every additional £1 of sales contributes around 40p towards profit, assuming the margin holds.
Why it matters beyond “am I profitable?”
The most useful application is hiring.
Suppose you are considering someone who would add £2,000 a month to your fixed costs. At a 40% margin:
£2,000 ÷ 40% = £5,000 of additional monthly sales needed
So the question is not “can I afford another £2,000 a month?” It is “can the business generate another £5,000 of sales every month?”
That is a very different conversation, and it is the right one. The same logic applies to a new lease, a vehicle, a software subscription or any other ongoing commitment.
Break-even moves
This is the part people miss. The figure is not permanent.
If your gross margin slips from 40% to 35%, with the same £6,000 of fixed costs:
£6,000 ÷ 35% = £17,143 a month
Same fixed costs. Same business. But you now need £2,143 more sales every month just to stand still.
Costs creep. Margins change. The break-even figure you calculated eighteen months ago may bear no relation to today’s. It is worth recalculating whenever your fixed costs change materially or your gross margin moves.
What counts as a fixed cost
Fewer costs are genuinely fixed than most people assume, and the distinction matters here because it sits in the top half of the calculation.
Rent is fixed until the lease ends. Salaries are fixed until staffing changes. Some costs step up rather than rising smoothly. If you are unsure which of your costs belong where, it is worth working through which of them would actually fall if sales dropped before relying on the result.
Two refinements
If your sales are seasonal, a single monthly break-even figure can mislead. A quiet month below break-even is not a problem if the busy months more than cover it. In that case, look at break-even across the year as well as monthly.
It is also worth remembering that break-even is a profit measure, not a cash measure. A business can trade above break-even and still run short of cash if customers pay slowly. That is a question about debtor days and cash runway.
Where to start
Add up the monthly costs that would continue regardless of sales. Work out your gross margin percentage. Divide one by the other.
Then compare the answer with what you actually sell each month. If break-even sits uncomfortably close to your normal turnover, that is worth knowing now rather than at year end — because it means a quiet month or a lost customer takes you into a loss immediately.
Compliance is important. Understanding your numbers is where the real value lies.
If you would like help calculating your break-even point or testing what a hire would mean for it, book a consultation.
