Break-Even Analysis for Your Business Plan: Step-by-Step Guide

What Is a Break-Even Analysis and Why It Matters

A break-even analysis determines the point at which your total revenue equals your total costs -- the moment your business stops losing money and starts generating profit. It is one of the most fundamental calculations in any business plan, and lenders and investors look for it specifically.

For SBA lenders, the break-even analysis answers a critical question: how much revenue does this business need to cover its costs, and how realistic is it that the business will reach that level? A clear break-even analysis builds credibility because it shows you understand your cost structure and have modeled realistic scenarios.

The Break-Even Formula

The basic break-even formula is straightforward:

Break-Even Point (units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

The denominator -- selling price minus variable cost -- is called the contribution margin per unit. It represents how much each sale contributes toward covering your fixed costs.

For Service Businesses

If you do not sell discrete units, use the revenue-based formula:

Break-Even Point (revenue) = Fixed Costs / Contribution Margin Ratio

Where Contribution Margin Ratio = (Revenue - Variable Costs) / Revenue

Step 1: Identify Your Fixed Costs

Fixed costs remain constant regardless of sales volume. Common fixed costs include:

• Rent and utilities: Monthly lease payment, electricity, water, internet
• Salaries: Base pay for employees (not commission-based compensation)
• Insurance: General liability, property, workers compensation
• Loan payments: Monthly debt service on business loans
• Software subscriptions: Monthly fees for tools and platforms
• Depreciation: Spread of equipment costs over useful life
• Marketing retainers: Fixed monthly marketing commitments

Add up all monthly fixed costs and multiply by 12 for annual. Example: A small retail store might have $8,500/month in fixed costs ($102,000 annually): rent $3,500, one salaried employee $3,000, insurance $500, utilities $400, software $200, loan payment $600, misc $300.

Step 2: Calculate Variable Costs Per Unit

Variable costs change proportionally with sales volume:

• Cost of goods sold (COGS): Raw materials, wholesale product cost, manufacturing
• Commission-based pay: Sales commissions, delivery driver pay per order
• Payment processing: 2.9% + $0.30 per transaction (Stripe/Square)
• Packaging and shipping: Per-order costs for e-commerce businesses
• Supplies consumed per service: Hair color per salon appointment, cleaning supplies per job

Example: A coffee shop sells drinks at an average price of $5.50. Variable costs per drink: coffee beans and milk $1.20, cup and lid $0.30, payment processing $0.46. Total variable cost: $1.96 per drink.

Step 3: Calculate Your Break-Even Point

Using the coffee shop example:

• Fixed costs: $8,500/month
• Selling price: $5.50 per drink
• Variable cost: $1.96 per drink
• Contribution margin: $5.50 - $1.96 = $3.54 per drink
• Break-even: $8,500 / $3.54 = 2,401 drinks per month (approximately 80 drinks per day)

Is 80 drinks per day realistic? That depends on foot traffic, location, and operating hours. This is exactly the kind of sanity check a break-even analysis provides. If your location only sees 200 people walk by per day and you need 80 of them to buy a drink, the numbers do not work.

Step 4: Create a Break-Even Chart

Visual presentation matters. A break-even chart plots three lines:

• Total fixed costs: A horizontal line (fixed costs do not change with volume)
• Total costs: A line starting at fixed costs and rising with variable costs per unit
• Total revenue: A line starting at zero and rising with each unit sold

The point where the total revenue line crosses the total costs line is your break-even point. Everything to the right of that intersection is profit. Everything to the left is loss. This visual makes the concept immediately clear to lenders who may not want to work through formulas.

What Lenders Look For in Break-Even Analysis

When reviewing your business plan, lenders evaluate the break-even analysis for several things:

Reasonableness

Is the break-even volume achievable given your market, capacity, and marketing plan? A restaurant that needs to serve 300 covers per day in a 60-seat space is not credible (that requires 5 turns, which only fast food achieves).

Time to Break-Even

How many months until you reach break-even volume? Lenders want to see that you have enough working capital (cash reserves plus the loan amount) to sustain the business until it breaks even. Most small businesses reach break-even within 12-24 months. If your projections show break-even at month 36, you need significant working capital.

Margin of Safety

What happens if revenue comes in 20% below projections? Lenders prefer businesses where the break-even point is significantly below the realistic revenue projection. This gap -- called the margin of safety -- shows the business can absorb setbacks and still survive.

Break-Even Analysis for Multiple Products or Services

Most businesses sell more than one product. In this case, use the weighted average contribution margin:

• Calculate contribution margin for each product
• Determine the sales mix (what percentage of total sales each product represents)
• Multiply each contribution margin by its sales mix percentage
• Sum the results for the weighted average contribution margin
• Divide fixed costs by the weighted average to get break-even in total units

Sensitivity Analysis: The Pro Move

A basic break-even analysis uses your best estimates. A strong business plan includes a sensitivity analysis showing break-even under different scenarios:

• Base case: Your realistic projections
• Best case: Revenue 15-20% higher than base (show what drives upside)
• Worst case: Revenue 20-30% lower than base (show how you survive)

Showing all three scenarios tells lenders you have thought through risks and have contingency plans. This builds the kind of trust that gets loans approved. For a deeper look at building comprehensive financial projections, see our guide on business plan financial projections.

The break-even analysis turns abstract financial projections into a concrete, understandable target. It answers the question every business owner should be able to answer: how much do I need to sell to stay in business?