Break-even analysis for a small business: formulas and a worked example

Break-even is the sales level at which your business neither makes nor loses money. You find it by splitting costs into fixed and variable, working out how much each sale contributes towards fixed costs, and dividing. The formula is simple: break-even units equal fixed costs divided by contribution per unit. Knowing this number tells you what price to charge, whether you can afford a new hire, and how safe you are when sales dip.

Why break-even matters more than profit

Most owners look at one number every month: did we make money or not. That number is a result, not a lever. Break-even analysis shows you the levers behind it. It tells you how many orders, plates, invoices or units you need before the first rupee of profit arrives, and what happens to that number when rent rises or you drop your price for a festival sale.

It is also the calculation lenders and investors quietly do in their heads when they read your projections. If you can say "we break even at 1,400 orders a month and we are doing 1,900", you sound like someone who understands their business. That confidence is worth a lot when you are negotiating with a bank, a supplier or a landlord. If you are planning to borrow, read our guide to MUDRA, CGTMSE and bank loans alongside this one.

Fixed costs versus variable costs

Every cost in your business falls into one of two buckets, and the whole method depends on sorting them honestly.

Fixed costs stay the same whether you sell 10 units or 1,000 units in a month. Rent, salaries of permanent staff, insurance, software subscriptions, loan EMIs (the interest part is a cost; the principal is a repayment, but for cash break-even most owners include the full EMI), electricity minimum charges, accountant fees and depreciation on equipment all belong here.

Variable costs rise and fall with each unit sold. Raw materials, packaging, delivery charges per order, platform commission, payment gateway charges, piece-rate wages, and the cost of goods you buy for resale are variable. If a cost disappears when you sell nothing, it is variable.

Some costs are mixed. Your electricity bill has a fixed connection charge plus a usage component that rises with production. Your delivery boy may get a fixed salary plus a per-delivery incentive. Split these into their two parts rather than dumping the whole bill into one bucket. A rough split is fine; the aim is a useful number, not a perfect one.

One trap: your own salary. If you draw ₹40,000 a month from the business, treat it as a fixed cost. Many proprietors leave it out, calculate a low break-even, and then wonder why the bank balance never grows. The business must cover your living expenses before it is truly profitable.

Contribution margin: the number that does the work

Contribution per unit is what is left from each sale after paying the variable costs of that sale. That amount goes towards covering fixed costs, and once fixed costs are covered, it becomes profit.

Contribution per unit = Selling price per unit minus Variable cost per unit

Contribution margin ratio = Contribution per unit divided by Selling price per unit

If a plate of biryani sells for ₹250 and its variable cost (ingredients, packaging, platform commission, delivery) is ₹150, the contribution is ₹100 and the contribution margin ratio is 40 percent. Every ₹100 of sales sends ₹40 towards rent and salaries. Note that contribution margin is not the same as gross margin or markup; if those terms confuse you, our post on margin versus markup sorts them out with a table.

Use prices and costs excluding GST. If you are a regular registered dealer, the GST you collect is passed to the government and the GST you pay on inputs comes back as credit, so neither belongs in the calculation. If you are under the composition scheme, the 1 percent or 5 percent tax you pay is money out of your pocket and behaves like a variable cost on sales.

The break-even formulas

There are two versions, depending on whether you think in units or in rupees.

For a shop selling hundreds of items, use the revenue version with a blended contribution margin ratio. Work it out from last quarter: total sales excluding GST minus total variable costs, divided by total sales. A kirana store might land at 12 to 18 percent, a clothing boutique at 40 to 50 percent, a service business at 60 percent or more.

Worked example: a Bengaluru cloud kitchen

Priya runs a cloud kitchen in HSR Layout serving North Indian meals through food delivery apps and direct WhatsApp orders. Her average order value is ₹320 excluding GST. Here are her monthly numbers.

Fixed costs per month

Variable cost per order

Contribution per order = ₹320 minus ₹200 = ₹120

Contribution margin ratio = ₹120 / ₹320 = 37.5 percent

Break-even orders per month = ₹1,34,000 / ₹120 = 1,117 orders (round up, since you cannot sell a fraction of an order)

Break-even revenue = ₹1,34,000 / 0.375 = ₹3,57,333 per month

Priya's kitchen runs 26 days a month, so she needs about 43 orders a day just to cover costs and her own salary. Last month she did 1,450 orders, which is ₹4,64,000 in sales.

Profit last month = (1,450 minus 1,117) x ₹120 = 333 x ₹120 = ₹39,960

Margin of safety = (₹4,64,000 minus ₹3,57,333) / ₹4,64,000 = 23 percent

Her sales could fall by 23 percent before she starts losing money. That is a reasonable cushion, but not a large one for a business that depends on app algorithms and monsoon-season demand swings.

Using break-even for pricing decisions

Once you have the model, small changes become easy to test. Suppose Priya is thinking of raising her average order value to ₹350 by adding a ₹30 dessert to most combos, with a variable cost of ₹12 for the dessert.

New contribution per order = (₹350 minus ₹212) = ₹138

New break-even = ₹1,34,000 / ₹138 = 971 orders

That is 146 fewer orders a month to break even, without any change in fixed costs. If she keeps doing 1,450 orders, profit rises to (1,450 minus 971) x ₹138 = ₹66,102, a jump of about ₹26,000 a month from one menu change.

Now the opposite: a delivery platform pushes her to run a 20 percent discount campaign. Her price drops to ₹256, and the platform still takes commission on the discounted price, so the variable cost falls slightly to ₹187. Contribution per order = ₹69. Break-even = ₹1,34,000 / ₹69 = 1,942 orders. She needs 74 percent more orders just to stand still. Unless the campaign brings in that many extra orders, and keeps some of them after it ends, it destroys money. Run this arithmetic with the discount calculator before agreeing to any platform promotion.

Using break-even for hiring decisions

Hiring adds to fixed costs, so the question is always: how many more units must we sell to pay for this person, and is that realistic?

Priya wants to hire a second helper at ₹15,000 a month so that she can take more lunchtime orders. Extra fixed cost = ₹15,000. Extra orders needed just to cover the hire = ₹15,000 / ₹120 = 125 orders a month, or about 5 per day. If the helper lets the kitchen handle 10 more orders a day at lunch, the hire pays for itself twice over. If the constraint is demand rather than kitchen capacity, the hire only adds cost.

The same logic works for any fixed commitment: a bigger shop, a second delivery bike, a new software subscription, a franchise fee. Divide the extra monthly cost by contribution per unit and ask whether that many extra sales are likely. If you have not yet hired anyone, our hiring your first employee checklist covers the compliance side.

Break-even for service businesses and traders

Service businesses usually have high contribution margins and almost everything is fixed. A Pune freelance designer charging ₹1,200 an hour with almost zero variable cost has a contribution margin near 100 percent. Her break-even is simply fixed costs divided by hourly rate: if her monthly costs including her own drawing are ₹90,000, she needs 75 billable hours, or under 4 hours a day on a 20-day month. The rest is profit, but the trap is unbillable time. If only half her working hours are billable, she needs to be at her desk 150 hours to hit 75 billable ones.

Traders have the opposite shape: thin contribution margins and turnover-driven profits. A Surat textile trader buying saris at ₹800 and selling at ₹920 has a contribution of ₹120 per piece, a ratio of about 13 percent. With fixed costs of ₹2,40,000 a month (godown, two staff, transport contract, his own drawing), he needs to sell 2,000 pieces or ₹18,40,000 of goods each month. For traders, a small change in purchase price or a slow-paying customer who forces you into an overdraft matters far more than it would for a designer. Track receivables closely; an outstanding statement that shows who owes you and for how long is the first tool to keep open.

Common mistakes

Forgetting your own salary. Covered above, but it is the most common error and it makes the break-even look artificially low.

Treating GST as revenue. If you sell at ₹118 including 18 percent GST, your price for break-even is ₹100. Owners who use the gross figure overstate contribution by the tax amount.

Ignoring platform commission and payment charges. Delivery apps, marketplaces and payment gateways take a slice of every sale. These are variable costs and they are often the largest one after raw materials.

Using list price when you actually discount. If your price is ₹500 but the average customer pays ₹430 after bargaining and offers, use ₹430.

Mixing annual and monthly costs. Licence fees, insurance premiums and CA fees often come once a year. Divide them by 12 before adding them to monthly fixed costs.

Assuming costs stay linear. Beyond a certain volume you may need a bigger kitchen, a second machine or another staff member. Fixed costs step up. Recalculate at each step rather than extrapolating from today's numbers.

Treating break-even as a target. Break-even is the floor, not the goal. Use the "units for a target profit" formula to set a real target that includes the return you want on your effort and capital.

Limitations of break-even analysis

Break-even assumes one price, one cost structure and one product mix, all frozen in time. Real businesses have seasonal demand, price changes, product lines with very different margins, and costs that step up as you grow. It also ignores cash timing: a business can be above break-even on paper and still run out of cash because customers pay 60 days late while suppliers demand payment in 15. Pair break-even with a simple cash flow view and, if you sell on credit, with the MSME 45-day payment rule that gives you legal backing to collect.

Finally, contribution margins are averages. If you sell both a 60 percent margin item and a 10 percent margin item, a shift in what customers buy changes your break-even even when total sales are unchanged. When your mix moves, redo the numbers.

How VyaparKit helps

The free break-even calculator takes your fixed costs, selling price and variable cost per unit and gives you break-even units, break-even revenue and the sales needed for a target profit, without a login. The profit margin calculator and markup calculator help you get the contribution per unit right when you only know cost and markup. Before agreeing to a festival offer, the discount calculator shows what the discount does to your per-unit contribution. These are calculators, not an accounting system, so the cost inputs still come from your own records or your CA.

Next steps

• List every monthly cost and sort it into fixed and variable, including your own drawing.
• Work out contribution per unit (or the blended contribution margin ratio) using prices excluding GST.
• Calculate break-even units and revenue, then compare with your last three months of actual sales.
• Compute your margin of safety; if it is under 15 percent, look for one fixed cost to cut or one price to raise.
• Re-run the numbers before every price change, promotion, hire or lease renewal.