Free tool
What does it actually have to turn over?
Most break-even calculators tell you the point at which the business loses nothing, which is also the point at which it pays you nothing. That is not a useful number. This works three lines instead: covering the costs, paying a market wage for whoever runs the place, and carrying the debt on top.
Break-even
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
Your revenue
620,000 dollars
Above the full line by
26,061 dollars
Everything is covered, with $26,061 of revenue to spare.
Covers its costs: reached
$371,000
About 67 sales a day at $18
Pays you a market wage: reached
$500,000
About 90 sales a day at $18
Services the debt as well: reached
$593,000
About 106 sales a day at $18
Contribution margin
66.0%
What each dollar of revenue leaves behind.
Revenue can fall by
4.2%
Before the full line is breached.
Revenue to spare
$26,000
Above the full line.
Indicative only, on the figures you entered, and it assumes the cost of sales share holds as revenue moves. In most businesses it does not hold perfectly, which is worth testing before anyone relies on the answer.
The method
One division, done three times.
The arithmetic is simple enough to do on paper. What changes the answer is what you decide to put above the line, and the wage is the one everybody leaves out.
| Line | How it is worked out | Why it matters |
|---|---|---|
| Contribution margin | One hundred per cent less the cost of sales share. At 34% cost of sales, every dollar leaves 66 cents. | It sets the exchange rate between cost and revenue. An extra $10,000 of rent needs about $15,150 of revenue behind it at that margin, not $10,000. |
| Covers its costs | Fixed costs divided by the contribution margin. | The point at which the business loses nothing. It also pays you nothing, which is why stopping here is misleading. |
| Pays you a market wage | Fixed costs plus a wage for whoever runs it, divided by the contribution margin. | The point at which the business is a job rather than a hobby. Most break-even sums never get here. |
| Services the debt as well | Fixed costs plus the wage plus annual principal and interest, divided by the contribution margin. | The point at which it is an asset. This is the line a lender is testing when it asks for cover above 1.00x. |
Contribution margin
- How it is worked out
- One hundred per cent less the cost of sales share. At 34% cost of sales, every dollar leaves 66 cents.
- Why it matters
- It sets the exchange rate between cost and revenue. An extra $10,000 of rent needs about $15,150 of revenue behind it at that margin, not $10,000.
Covers its costs
- How it is worked out
- Fixed costs divided by the contribution margin.
- Why it matters
- The point at which the business loses nothing. It also pays you nothing, which is why stopping here is misleading.
Pays you a market wage
- How it is worked out
- Fixed costs plus a wage for whoever runs it, divided by the contribution margin.
- Why it matters
- The point at which the business is a job rather than a hobby. Most break-even sums never get here.
Services the debt as well
- How it is worked out
- Fixed costs plus the wage plus annual principal and interest, divided by the contribution margin.
- Why it matters
- The point at which it is an asset. This is the line a lender is testing when it asks for cover above 1.00x.
A worked example
A business that pays its owner but not the bank.
Revenue of $480,000, cost of sales at 38%, so every dollar leaves 62.0% behind. Fixed costs of $196,000, a market wage of $85,000 for whoever runs it, and $74,000 a year of debt service.
It covers its costs at $316,000 and pays the wage at $453,000. Both are comfortably met. The third line sits at $572,000, and revenue is $92,581 short of it.
Nothing about that business looks broken from the inside. The owner is paid, the bills are met, and the accounts show a profit. The shortfall comes out of the owner's own pocket, quietly, every year, and it is the single most common reason a buyer finds themselves working for less than they earned before.
What this does not cover
- Seasonality, which moves the answer month to month
- Any change in the cost of sales share as volume moves, which is real in most businesses
- Tax, drawings beyond the wage entered, or the structure the business sits in
- Working capital, and the gap between making a sale and being paid for it
- Capital expenditure, which does not appear in a break-even sum but still has to be funded
Want it modelled properly, across years?
A break-even sum holds everything still. The Debt Capacity Assessment runs your actual financials with the cost structure moving, the covenants tested and the downside cases built. $1,850, 5 business days.
Want the finance arranged as well?
This site does the analysis and the documents, and does not arrange credit. The broking is done by The Lending Lab, a separate business run by the same person. Send a few details and Nicholas handles it himself.
Common questions
Because there are three different questions and most calculators only answer the first. Covering costs means the business loses nothing, which also means it pays you nothing. Paying a market wage for whoever runs it is the point at which the business is a job rather than a hobby. Covering the debt on top is the point at which it is an asset. A business can sit between any two of those lines, and which gap you are in decides what to do about it.
Because somebody has to do the work, and if you stopped tomorrow you would have to pay someone to do it. Leaving your own labour out moves the break-even point down by exactly what a replacement would cost, which makes the business look better than it is by precisely the amount you are working for free. A lender does this deduction. So does a buyer. It costs nothing to do it yourself first.
What is left of each dollar of revenue once you have paid for the thing you sold. If cost of sales is 34%, every dollar leaves 66 cents behind to pay rent, wages, the loan and eventually you. It is the number that decides how much extra revenue you need to cover any extra cost: at a 66% margin, an extra $10,000 of rent needs about $15,150 of revenue behind it, not $10,000.
Sometimes, and that is the useful part. If the number of sales a day required to cover everything is well beyond what the premises can physically serve, the business does not work at that cost base regardless of how good the operator is. Better to find that out on a screen than after settlement.
No. It is one year at one set of assumptions, and it holds the cost of sales share constant as revenue moves, which no real business does perfectly. It is a sense check rather than a plan. A three-way forecast is the thing that models it properly, and it is priced on the site.
General information only. Not credit advice, not a credit assessment, and not an offer of finance. Andorra Advisory Group does not arrange credit and is not a credit representative.