Break-Even Analysis
What is break-even analysis?
Break-even analysis finds the level of revenue, or the number of billable hours, at which a business covers all its costs and earns neither a profit nor a loss. Above that point, each additional dollar of revenue adds to profit.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that keeps fixed and variable costs separated in the books, so break-even calculations rest on accurate figures.
How to calculate it
- Add up fixed costs for the period, such as rent, salaries, and software
- Calculate contribution per hour or per dollar of revenue after variable costs, see contribution margin ratio
- Divide fixed costs by that contribution to find the break-even point
The figures below are illustrative. A firm has $60,000 of monthly fixed costs and earns $75 of contribution per billable hour, so it breaks even at 800 billable hours.
Why it matters for service firms
Break-even analysis helps owners decide how many hours or projects are needed to cover the cost structure. It is also useful before hiring, taking on a lease, or cutting prices.
Frequently asked questions
What is the difference between fixed and variable costs?
Fixed costs stay the same regardless of activity in the short term, such as rent. Variable costs change with the work delivered, such as subcontractors. Separating them is the first step in any break-even calculation.
How often should a firm revisit break-even?
Whenever costs or pricing change materially, and at least once a year. A break-even figure that is out of date can give false comfort about hiring or spending decisions.
Related terms and guides: contribution margin ratio, cost structure, operating expenses, and scenario planning.