What Is a Good Break-Even Point?
Break-even is not a target to hit but a line to clear, and the useful question is how far above it you expect to trade. Here is how to read the number, why a low break-even matters more than a low cost base, and the version of it that a bank balance actually recognises.
The number on its own means nothing
A break-even of two hundred units is excellent if you sell a thousand and alarming if you sell two hundred and ten. What matters is the distance between break-even and your realistic volume — the margin of safety.
A business trading five percent above break-even is one slow month from a loss. One trading forty percent above absorbs a bad quarter without drama. Same arithmetic, entirely different businesses.
Include your own pay, or the number is fiction
A break-even calculated without the owner's salary is the point at which the business covers everyone except the person running it. It is a comforting number and a useless one.
Put your own pay into fixed costs at the rate you would pay a replacement. The break-even rises, and it becomes a figure you can plan against.
Cash break-even is the one that bites
Accounting break-even counts depreciation, which is an expense with no cash attached, and ignores loan principal repayments, owner draws, and stock bought before it is sold — all of which are cash leaving with no expense recorded.
Between the two points a business is profitable on paper and still emptying its bank account. That gap is the most common way an apparently healthy small business runs out of money, and it is worth knowing the size of yours.
Common questions
- What is a healthy margin of safety?
- Higher is better, and the right floor depends on how volatile your sales are. A business with steady recurring revenue can live closer to the line than one dependent on a few large orders — the question is how bad a bad month realistically gets.
- Should break-even include the owner's salary?
- Yes. Excluding it produces a number that looks achievable and describes a business that cannot pay you. Include your pay at replacement rate and the figure becomes something you can actually plan against.
- Why is my cash break-even higher than my accounting one?
- Because loan principal, owner draws, and inventory bought ahead of sale are cash out with no expense recorded, while depreciation is an expense with no cash out. If you have a loan or hold stock, the cash figure is the one your bank balance responds to.
Run it for your numbers:
Find your break-even point