Break-even analysis: the formula, and the three versions of the answer

The formula, and what it hides

Break-even analysis calculates the sales volume at which total revenue equals total costs, by dividing fixed costs by the contribution margin each unit generates — the point below which the business consumes capital and above which it produces it.

break-even units = fixed costs ÷ (price − variable cost per unit)

One division. The difficulty is never the arithmetic; it is that both inputs are judgement calls, and that the single number the formula produces answers a question most people are not actually asking.

Fixed and variable is about behaviour, not about feel

The classification decides the answer, and it is done wrong more often than the division.

Variable costs change with the next unit sold: per-customer hosting, payment processing, the support hours that scale with volume, the cost of goods.

Fixed costs do not: salaries, rent, tooling, the base infrastructure bill.

Two traps.

Salaries feel variable and behave fixed. A support team hired for a customer count is a fixed cost until you fire someone, and you do not fire someone for one cancellation. Anything that only changes in steps is fixed within the step.

Infrastructure feels fixed and is partly variable. A hosting bill has a floor and a slope. Treating the whole thing as fixed understates the contribution margin, which understates break-even — an error in the flattering direction.

The test is not how the cost feels. It is whether it changes if you sell one more unit tomorrow.

The three break-even points, in the order you reach them

This is where the single formula misleads, because "break-even" names three different moments and companies reach them months apart.

1. Contribution break-even

Price exceeds variable cost. One sale stops losing money on itself.

Below this there is no volume that helps — the contribution margin is negative, so every additional customer widens the loss and growth is actively harmful. A business here does not have a break-even point at all, and no amount of scale creates one.

2. Operating break-even

Total contribution covers total fixed costs. This is what the formula computes and what people mean by the phrase.

3. Cash break-even

Money in exceeds money out, in the period it actually moves.

This is the only one that decides whether the company survives, and it is the one nobody calculates. A business invoicing on 60-day terms is profitable on paper two months before it is solvent in fact. Annual plans invert it in your favour; enterprise net-90 terms make it much worse. The gap between operating and cash break-even is the collection cycle, and it is funded out of the bank balance whether or not anyone modelled it.

A company can pass the second test and fail the third, and the second is the one on the slide.

A worked example

A B2B tool: £90/month, £14/month of variable cost per customer, £38,000/month of fixed costs.

Contribution margin. £90 − £14 = £76 per customer per month. Positive, so a break-even exists.

Operating break-even. £38,000 ÷ £76 = 500 customers.

Now churn. At 3% monthly churn, holding 500 customers means replacing 15 every month before growing at all. That replacement is not free — at a £600 CAC it is £9,000 a month of acquisition spend that the fixed-cost figure did not include.

Treat that maintenance acquisition as what it is, a recurring cost of standing still, and fixed costs are effectively £47,000. Break-even moves to £47,000 ÷ £76 = 619 customers.

That is a 24% higher target than the formula gave, and it is the honest one. The naive 500 describes a company that acquires no one, which is not a company.

Cash break-even. If those customers pay monthly by card, cash and operating break-even are roughly the same. If half are invoiced on 60-day terms, the company needs about two months of contribution — around £94,000 — sitting in working capital before the bank balance tracks the P&L.

Three answers: 500, 619, and 619-plus-£94,000-of-float. All three are correct about different questions, and only the third answers "will we survive".

Subscription businesses need the formula rewritten

The unit formula assumes a one-off sale. Subscription revenue recurs and the base erodes, so break-even is a level of retained MRR, not a count of transactions.

break-even MRR = fixed costs ÷ gross margin

At 78% gross margin and £38,000 of fixed costs, that is roughly £48,700 of MRR.

Two things this version makes visible that the unit version does not.

Churn moves the target while you approach it. At 5% monthly churn the base loses a fifth of itself a year. Break-even is not a line you cross once; it is a line you have to keep crossing.

Expansion revenue counts. Net revenue retention above 100% means the existing base grows without new sales, which moves you toward break-even with no acquisition cost at all. This is the single cheapest route to it and the one most often left out of the model.

Where CAC belongs, and where it does not

CAC is not a variable cost of the unit. It is the cost of getting the unit.

Put it in the denominator and the contribution margin collapses, break-even climbs, and the number you get describes a company that stops acquiring customers the moment it reaches it. That is not a business plan.

The correct treatment is two separate calculations that answer different questions:

• Break-even asks: at what volume do we stop losing money on operations?
• CAC payback asks: how long until a customer repays what it cost to get them?

The second is CAC ÷ (gross margin × monthly ARPU) and has its own thresholds — 18 months is the standard early-stage benchmark, and beyond roughly 36 the model has stopped being a business. A company can be at break-even with a 40-month payback, and it is not safe; it is financing its customers with capital it does not have.

Where CAC does enter break-even honestly is as maintenance acquisition — the spend required to replace churn at a flat customer count, as in the example above. That is a genuine recurring cost of standing still, and it belongs in fixed costs rather than in the margin.

What the number is actually for

Not a target. Break-even is a diagnostic, and it answers three questions worth more than the number itself.

Is the business shaped like a business? A negative contribution margin means no volume helps. That is a pricing or a cost-structure problem, and it is better found by arithmetic than by a year of growth.

Is break-even reachable from here? 619 customers when you have 60 and add 8 a month is a six-year plan, and the fixed costs were chosen for a company that does not exist yet. That is a decision about the cost base, not about sales.

How far can the runway carry you? Months of cash divided by monthly burn, against months to break-even at the current rate. If the second exceeds the first, the plan requires a raise, and knowing that now is worth more than any of the preceding arithmetic.

The errors that flatter

Each of these produces a break-even that is too low, and none of them looks like a mistake.

The direction is consistent, and it is not a coincidence. Every convenient assumption moves the number the same way, so a break-even computed without deliberate pessimism is systematically optimistic — which is why it is worth computing twice, once as you would like it and once as your accountant would.