Your break-even point is your fixed costs divided by your contribution margin. If your fixed costs are R180,000 a month and you keep about 42 cents of every rand of sales after variable costs, you break even at R429,231 of monthly revenue. Below that you lose money, above it you make it.
It is the single most useful number a small business can calculate, and most owners have never worked it out — which means they cannot tell you what a bad month actually looks like until the bank balance tells them.
The formula
Break-even revenue = Fixed costs ÷ Contribution margin
Where contribution margin = (Revenue − Variable costs) ÷ Revenue
In units, if you sell a defined product:
Break-even units = Fixed costs ÷ Contribution per unit
Step 1: split your costs
This is where the calculation is won or lost.
Variable costs change with sales volume:
Stock and raw materials
Direct labour paid per unit or per job
Subcontractors on specific work
Sales commission
Delivery and freight
Payment gateway and merchant fees
Fixed costs are incurred whether you sell anything or not:
Rent
Salaries of permanent staff
Insurance
Software subscriptions
Accounting fees
Loan repayments — the interest, at least
Utilities and telephone
The test: if you sold nothing next month, would this cost disappear? If yes, it is variable. If no, it is fixed.
Semi-variable costs exist — electricity in a manufacturing business, for instance. Split them, or classify them where they mostly sit and note the assumption.
Step 2: calculate contribution margin
A worked example. A business with R620,000 of monthly revenue and R360,000 of variable costs.
| Amount | |
|---|---|
| Revenue | R620,000 |
| Variable costs | (R360,000) |
| Contribution | R260,000 |
| Contribution margin | 41.9% |
In plain terms: for every R100 of sales, R41.90 is left to cover fixed costs and produce profit.
Step 3: calculate break-even
Same business, with fixed costs of R180,000 a month.
Break-even = R180,000 ÷ 0.4194 = R429,231 of monthly revenue
Check it:
| Amount | |
|---|---|
| Revenue at break-even | R429,231 |
| Variable costs at 58.06% | (R249,231) |
| Contribution | R180,000 |
| Fixed costs | (R180,000) |
| Profit | R0 |
What it tells you: this business needs R429,231 a month to cover its costs. At R620,000 it has roughly R190,769 of headroom — revenue could fall 30.8% before it starts losing money.
That percentage is worth knowing. A business with 30% headroom survives a bad quarter. A business with 4% does not.
The two mistakes that make it wrong
1. Misclassifying costs
Putting salaries in variable costs is the most common error. Permanent staff are paid whether you sell anything or not — they are fixed. Only genuinely per-unit or per-job labour is variable.
Putting stock purchases in fixed costs is the reverse error, and it makes break-even look far lower than it is.
2. Forgetting that owner's drawings are a cost
Break-even that ignores what you need to live on is not break-even. It is the point at which the business stops losing money while paying you nothing.
Add your required drawings to fixed costs. In the example above, adding R60,000 of owner's remuneration takes fixed costs to R240,000 and break-even to R572,308 — a materially different number, and the honest one.
Using it
To price
If you know your contribution margin, you know what a discount actually costs.
A 10% discount on a 42% margin business does not cost 10% of profit. It removes 10 percentage points from a 42-point margin — a 23.8% reduction in contribution. To stand still you would need volume to rise by roughly a third.
That arithmetic stops a lot of unnecessary discounting.
See how to price your product so you actually make a profit.
To decide whether to hire
A new employee at R25,000 a month costs roughly R30,000 all-in once employer UIF, SDL, COIDA, leave and equipment are counted.
At a 41.9% contribution margin, that requires R71,538 of additional monthly revenue just to pay for itself.
Ask that question before hiring, not afterwards. See how to hire your first employee.
To sanity-check a decision
Any fixed cost commitment — a lease, a vehicle, a software contract — can be converted into the revenue it requires.
Required revenue = new fixed cost ÷ contribution margin
A R12,000 monthly lease at 41.9% margin needs R28,615 of extra sales to justify it. If the reason for taking the space does not plausibly generate that, it is not a good decision.
Where the number changes
Recalculate when:
Prices change, on either side
You add or remove permanent staff
You take on a new fixed commitment
Your product mix shifts materially — a business selling more of a low-margin line has a higher break-even even at the same revenue
Input costs move
Calculate it at least annually, and after any significant change. It is a five-minute exercise once your costs are properly classified.
The related number: margin of safety
Margin of safety = (Actual revenue − Break-even revenue) ÷ Actual revenue
In the example: (R620,000 − R429,231) ÷ R620,000 = 30.8%
What it means: revenue can fall 30.8% before you start losing money.
Rough guidance:
| Margin of safety | Reading |
|---|---|
| Below 10% | Fragile. A single lost customer is a problem |
| 10% – 25% | Workable, but plan for volatility |
| Above 25% | Comfortable |
This is a more useful stress test than most business plans contain, and it takes one line to calculate.
Frequently asked questions
How do I calculate my break-even point? Divide your fixed costs by your contribution margin, where contribution margin is revenue less variable costs, divided by revenue. If fixed costs are R180,000 a month and contribution margin is 41.9%, break-even revenue is R429,231.
What is the difference between fixed and variable costs? Variable costs change with sales volume — stock, materials, per-job labour, commission, delivery and payment fees. Fixed costs are incurred whether you sell anything or not — rent, permanent salaries, insurance, software and accounting fees. The test is whether the cost would disappear if you sold nothing.
Should owner's drawings be included in break-even? Yes, if you want the honest number. Break-even that ignores what you need to live on is the point at which the business stops losing money while paying you nothing. Add your required drawings to fixed costs.
What is contribution margin? Revenue less variable costs, expressed as a percentage of revenue. It tells you how much of every rand of sales is left to cover fixed costs and produce profit.
How does break-even help with pricing? It shows what a discount actually costs. A 10% discount on a 42% contribution margin removes ten percentage points from a 42-point margin, which is a 23.8% reduction in contribution — requiring roughly a third more volume just to stand still.
What is a good margin of safety? Above 25% is comfortable, 10% to 25% is workable but requires planning for volatility, and below 10% is fragile enough that a single lost customer becomes a serious problem.
How often should I recalculate break-even? At least annually, and whenever prices change, you add or remove permanent staff, you take on a new fixed commitment, or your product mix shifts materially towards higher or lower margin lines.
Five minutes, once your costs are classified
Break-even is simple arithmetic. What makes it hard is that most small businesses have never split fixed from variable costs properly, so the inputs do not exist.
Smartbook structures the chart of accounts so cost of sales and fixed overheads are separated from the start, and reports contribution margin and break-even in monthly management accounts.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Worked examples are illustrative. General guidance, not advice on your circumstances.