Break-even analysis for a small business: formula and example
Updated 2026-11-10
Short answer: Break-even revenue equals fixed costs divided by the contribution margin ratio. If your fixed costs are $20,400 a month and 42 cents of every sales dollar is left after variable costs, you break even at $20,400 / 0.42 = $48,571 a month. Anything above that is profit; anything below is a loss.
SBA calls break-even "an important part of any business plan presented to a potential investor," and lists it in its guidance for the financial section of a plan (SBA). Lenders look at it because it shows how much sales can drop before the business cannot pay its bills.
The formula
Break-even revenue = fixed costs / contribution margin ratio
Break-even units = fixed costs / (price per unit - variable cost per unit)
Three terms do the work:
- Fixed costs do not change with sales volume in the short run. Rent, insurance, salaried staff, software subscriptions and loan payments are the usual ones. SCORE gives rent, insurance and real estate taxes as examples (SCORE).
- Variable costs rise and fall with sales: ingredients, hourly labor tied to volume, card processing fees, supplies, fuel.
- Contribution margin is the share of each sales dollar left after variable costs. Per SCORE's template, that remainder is what contributes toward covering fixed expenses and generating profit (SCORE).
Contribution margin ratio = (sales - variable costs) / sales. If variable costs are 58% of sales, the ratio is 42%.
Step by step
- List every monthly cost and mark it fixed or variable. Costs that mix both, like utilities, usually go in whichever part is larger.
- Convert variable costs to a percentage of sales.
- Subtract that percentage from 100% to get the contribution margin ratio.
- Add up fixed costs for one month. Include the new loan payment, because a lender will.
- Divide fixed costs by the ratio.
- Convert the answer to something you can watch: customers per day or jobs per week.
You can skip the arithmetic with the break-even calculator.
Example 1: a restaurant
The numbers below are illustrative, not industry benchmarks. Replace them with quotes from your lease, suppliers and payroll. See restaurant startup costs for what to expect before opening.
| Fixed costs per month | Amount |
|---|---|
| Rent and common-area charges | $8,000 |
| Salaried manager and kitchen lead | $6,000 |
| Utilities, insurance, POS and other | $4,000 |
| Loan payment | $2,400 |
| Total fixed costs | $20,400 |
| Variable costs (percent of sales) | Share |
|---|---|
| Food and beverage | 31% |
| Hourly labor | 22% |
| Card fees, packaging and supplies | 5% |
| Total variable costs | 58% |
Contribution margin ratio = 100% - 58% = 42%.
Break-even revenue = $20,400 / 0.42 = $48,571 a month
That is about $1,868 on each of 26 operating days. At an average check of $22, the restaurant needs roughly 2,208 checks a month, or about 85 a day. If the sales forecast is $62,000 a month, the margin of safety is ($62,000 - $48,571) / $62,000 = 22%. Sales can fall about a fifth before the restaurant loses money.
Hourly labor is not perfectly variable, since you need a minimum crew whenever you open. Treating it as variable makes the example simple. A more careful model splits it into a fixed core crew and a variable part.
The restaurant projection template at /financial-projections/restaurant/ sets this up month by month.
Example 2: a cleaning business
Again, illustrative figures. A residential cleaning company charges an average of $150 per visit.
| Fixed costs per month | Amount |
|---|---|
| Insurance and bonding | $450 |
| Vehicle payment | $600 |
| Software and marketing | $900 |
| Storage and office | $400 |
| Owner salary | $3,000 |
| Loan payment | $650 |
| Total fixed costs | $6,000 |
Variable costs: cleaner wages and payroll taxes at 48% of sales, supplies at 7% and fuel and mileage at 5%, for a total of 60%. The contribution margin ratio is 40%.
Break-even revenue = $6,000 / 0.40 = $15,000 a month
At $150 a visit, that is 100 visits a month, or about 23 a week. The margin of safety against a $21,000 forecast is ($21,000 - $15,000) / $21,000 = 29%. The cleaning business projection template shows how recurring clients change the ramp.
Comparing the two
| Restaurant | Cleaning business | |
|---|---|---|
| Monthly fixed costs | $20,400 | $6,000 |
| Contribution margin | 42% | 40% |
| Break-even revenue | $48,571 | $15,000 |
| Break-even volume | About 85 checks a day | About 23 visits a week |
| Margin of safety at forecast | 22% ($62,000) | 29% ($21,000) |
The margins are similar. The fixed cost base is what separates them. A restaurant carries rent and a salaried core crew whether the dining room is full or empty, so it has to sell much more before it makes a dollar.
Break-even with a profit target
Break-even is zero profit, which is not enough to live on. To find the revenue for a target profit, add the target to fixed costs:
Required revenue = (fixed costs + target profit) / contribution margin ratio
If the restaurant owner wants $5,000 a month after all costs: ($20,400 + $5,000) / 0.42 = $60,476.
How it connects to your loan
Lenders test cash flow against the loan payment, so keep the payment inside your fixed costs. A related test is DSCR, which compares operating cash flow with total debt payments. SBA requires at least 1.10 on 7(a) Small loans and 1.15 on larger 7(a) loans. See our guide to DSCR and what SBA lenders want in projections.
SCORE advises that a break-even analysis is a critical part of financial projections for a new business, because financing sources want to see when you expect to break even, and suggests aiming for six to 18 months after launch (SCORE). If your model reaches break-even later than that, check the ramp-up assumption or the fixed cost base before a lender does.
Common mistakes
- Leaving out the owner's pay or the loan payment.
- Using the average margin when your best-selling items have a different margin from the rest.
- Treating every cost as fixed, which pushes break-even too high, or every cost as variable, which makes it too low.
- Forgetting seasonality. Run the formula for your slowest month, not just the average.
- Assuming you hit break-even in month one. Early months usually have lower sales and the same fixed costs.
Check your cost classifications with your accountant if you are unsure how a mixed cost behaves.
Next step
Enter your fixed costs and variable cost percentages in the break-even calculator, then carry the result into your monthly projections. If the break-even month falls later than your cash can last, that is the number to fix first.