Guides
How to calculate your store's break-even point
The FlowPOS product team
Almost every business knows what it sold last month. Far fewer know how much they needed to sell in order not to lose money. That figure is the break-even point, and it is the difference between saying "we sold Q80,000" and knowing whether that was a good month.
This guide works it out step by step, with example numbers, and explains what to do with the result.
The three figures you need
Fixed costs. What you pay every month whether you sell or not: rent, base salaries, internet, utilities, insurance, loan payments. If the shop closes for a week, these keep running.
Variable cost per sale. What each item you sell costs you. In a store that is the purchase cost of the goods. In a restaurant it is the ingredient cost of the dish.
Selling price. What you charge.
The most common mix-up is putting salaries in variable costs. If you pay your cashier the same whether you sell 100 units or 300, that salary is fixed. Only commissions and sales-driven overtime are variable.
The formula
First work out the contribution margin: how much each sale leaves toward paying the fixed costs.
Contribution margin = Selling price − Variable cost
Then:
Break-even (units) = Fixed costs ÷ Contribution margin
A worked example
A clothing store with these example numbers:
| Item | Amount |
|---|---|
| Rent | Q6,000 |
| Base salaries | Q9,000 |
| Utilities and internet | Q1,200 |
| Other fixed | Q800 |
| Total fixed costs | Q17,000 |
Each garment sells for an average of Q180 and costs Q95.
Contribution margin = 180 − 95 = Q85
Break-even = 17,000 ÷ 85 = 200 garments
Two hundred garments a month. Below that the store loses money even when the till looks busy. Above it, every garment leaves Q85 clear.
Across 26 trading days that is about 8 garments a day. That number — 8 a day — is far more useful on the shop floor than "Q36,000 in monthly sales", because it is something a supervisor can count by mid-afternoon.
When you sell many different things
A store does not sell one garment at one price. There are two ways to handle it.
By average margin. Take last month's total sales and the total cost of goods sold. The difference divided by sales is your percentage margin:
Margin % = (Sales − Cost of goods sold) ÷ Sales
Break-even (Q) = Fixed costs ÷ Margin %
With Q60,000 in sales and Q33,000 in cost, the margin is 45%. So
17,000 ÷ 0.45 = Q37,778 in monthly sales to avoid a loss.
By category. More precise if your margins differ sharply between lines. Work it out separately and add the results. Worth doing when one category returns 20% and another 60%: the average hides that one is subsidising the other.
What to do with the number
Break-even is not a figure to file away. It drives three concrete decisions.
Deciding on a discount. Cutting the price 10% does not cut profit by 10% — it cuts the contribution margin. At Q180 with a Q95 cost, a 10% discount puts the price at Q162 and the margin at Q67, which is 21% less. To earn the same you have to sell 27% more units, not 10% more.
Assessing a new fixed cost. One more employee at Q3,500 raises break-even by
3,500 ÷ 85 = 41 garments a month. The question stops being "can I afford the
salary?" and becomes "will this bring in 41 more garments of sales?".
Knowing when to close a location. A branch that never reaches its break-even is not "selling a bit slowly": it is consuming the profit of the others.
The mistakes that repeat
Confusing margin with profit. The contribution margin pays the fixed costs first. Only what is left after covering them is profit.
Using list price instead of the real price. If you run promotions, your effective average price is lower than the tag, and real break-even is higher than what you calculated.
Forgetting the cost of goods that never sold. Last season's stock cleared below cost still consumed cash. Knowing how much never sold is a question of inventory control before it is one of accounting.
Calculating it once. Fixed costs change. A rent increase moves the number, and nobody recalculates until a month closes badly.
How often to redo it
Whenever a fixed cost changes, whenever your pricing structure changes, and in any case once a quarter. It is a fifteen-minute calculation if you have the costs to hand — and that is precisely the part that is usually missing.