Break-Even Sales Formula: How Much Do You Need to Sell to Stay Profitable?

Getting ready to apply for a commercial loan, but not sure if your financials will receive an approval from the bank? This is the final post in a series explaining financial equations and ratios so that you feel more prepared when you talk to the bank about your loan request. Next up: the Break-Even Sales Formula.

What Is the Break-Even Sales Formula?

Simply put, the Break-Even Sales Formula demonstrates how much revenue a company has to make to cover its fixed expenses, debt repayments, and unit production costs. In other words, it shows a business owner how much product they have to sell to avoid operating their business at a loss. Here's how you can calculate it:

Why Is It Important?

Break-Even Sales for starters gives business owners a simple revenue target to exceed to operate their business at a profit. More importantly, it is a fantastic tool for decision-making! Are you interested in hiring an Office Manager? Do you want to raise your prices? Should you purchase a bigger space and grow your business? By adjusting your break-even formula with the added cost of a new administrative employee (Fixed Expense), price increase (Contribution Margin Ratio), or building purchase (Debt Repayment), you can see how your revenue goal changes as you make decisions in your business.

Example of the Break-Even Sales Formula

ABC Company has fixed expenses of $425,000 and $75,000 in annual debt repayments. Its Contribution Margin is 50%. ABC Company's break-even sales target would be:

To take it a step further, if ABC Company decides to hire an Office Manager at a total cost to the company of $65,000, its Break-Even Sales Target would increase to: