Know your break-even point
This Break-even point Info Guide explains what break-even point is and tells you how to calculate your break-even point.
Break-even point is the level of sales at which you are making neither a profit nor a loss. Your break-even point tells you the minimum sales level you must achieve in order to avoid a loss. All the additional sales which you make above break-even point, less the variable costs resulting from these additional sales, will provide profit to your business.
Remember!
You need to be aware of the point at which your busines is just breaking-even. If your level of sales is not reaching break-even point, you are making a loss and you urgently need to take corrective action.
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Before you can calculate your break-even point, you first need to know your:
- contribution margin
- fixed and variable costs
You can then calculate your break-even point, using this break-even point formula:
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Use this formula to calculate your contribution margin:
For more on contribution margin, see How do I calculate my contribution margin?
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Once you know your variable costs and your fixed costs, you can identify your break-even point. This is the level of sales needed to at least cover all your costs. You need to know your break-even point to project when you'll make a profit.
Your total costs are your variable costs plus your fixed costs.
Fixed costs
Fixed costs do not vary directly with sales.
Variable costs
Variable costs vary directly with sales.
Semi-variable costs
Some costs are a mixture of fixed and variable elements. To get a clear idea of your cost-structure and its relationship with profits, you need to identify as accurately as possible the separate fixed and variable elements of your semi-variable costs. If you can't accurately identify the fixed and variable elements, an approximation will do, eg 80% fixed, 20% variable.
| Examples of semi-variable costs in a hotel |
| Payroll |
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- The minimum staffing requirement for a hotel to be open for business, regardless of the volume of business – at reception, in the kitchen and restaurant, as well as in the management structure.
- Pay costs of staff above this minimum level represent the variable element of the total payroll cost.
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| Energy |
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- Electricity and heating costs incurred in order for the hotel to be open for business – in public areas, in the kitchen around mealtimes, etc.
- Energy costs above these minimum levels comprise the variable element of energy costs bills
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For more on costs see our Controlling your costs Info Guide
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| How to calculate break-even point: Hotel Grill Bar Example |
| Profit & Loss Account - Hotel Grill Bar |
€ |
| Sales (6,000 guests spending €20 each, excl. VAT) |
120,000 |
| Cost of Sales (food and beverage costs) |
48,000 |
| Gross margin |
72,000 |
| Other variable costs (eg, linen and variable element) of pay and energy) |
18,000 |
| Contribution to fixed costs and profit (45% of Sales) |
54,000 |
| Fixed costs |
40,000 |
| Profit |
14,000 |
| |
- In this example, the fixed costs of the Grill Bar are a proportion of the hotel’s overall fixed costs, apportioned on a basis such as floor space.
- The contribution margin is €54,000, or 45% of sales.
- This Hotel Grill Bar will break-even at a sales level of €88,889:
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By using the average spend per cover (€20 per guest, excl. VAT), the sales level of €88,889 can be expressed in terms of numbers of covers. In the Hotel Grill Bar example, 4,444 covers are required to break-even:
In this example, there is a wide margin of safety, as the sales achieved by the Hotel Grill Bar (€120,000) are well above the minimum sales required to break-even (€88,889).
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Use this formula to calculate the level of sales needed to achieve a target-profit:
If the Hotel Grill Bar aims to earn a profit of €30,000, the required sales level is:
By using the average spend per cover (€20 per guest), the €155,556 sales level can be expressed in terms of numbers of covers. In this example, 7,778 covers (at an average spend of €20 per guest) are required to achieve the target-profit:
Quick Break-even & What If? Calculators
Break-even Workbook
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