Break-Even: How Many Sales You Need

Part B: Understand the Money

Ask many owners how many sales they need each month and you get a shrug, or a big round figure that came from nowhere. Ask them how many they need just to stop losing money, and the shrug gets bigger. That second number is your break-even, and it is one of the most calming things an owner can know.

The idea in one sentence

Break-even is the number of sales at which the business covers all its costs, including your pay, and makes no profit on top. One sale fewer and you lose money. One more and you begin to make some. It is the floor under everything else you plan.

To find it you need two things you may already have from the last few lessons. The first is your fixed costs for a month: the ones that arrive no matter what, including the pay you need to take home. The second is what each sale contributes after its own direct costs, its price minus what it costs to deliver. That leftover is what each sale gives toward paying the fixed costs.

Divide the first by the second. That is the number of sales you need.

A worked example with made-up numbers

Say a small contractor has fixed costs of $6,000 a month for insurance, truck, tools, software and advertising, and wants to pay themselves $3,000. Fixed costs including owner pay are $9,000. Say an average job brings $1,500, and materials and subcontract labor for it cost $900.

• Contribution per job: $1,500 − $900 = $600.
• Break-even jobs per month: $9,000 ÷ $600 = 15 jobs.
• Check: 15 × $1,500 = $22,500 revenue. Less 15 × $900 = $13,500, leaves $9,000, which exactly covers the fixed costs.

What if you want a profit on top of your pay, say $3,000 more? Then the business must cover $12,000, and $12,000 ÷ $600 = 20 jobs. And what if materials creep up so a job costs $1,000 to deliver? Contribution falls to $500, and break-even becomes $9,000 ÷ $500 = 18 jobs. Three extra jobs a month, from a cost you barely noticed.

The same arithmetic works for any kind of business, only the unit changes. Take a restaurant, again with invented numbers that you should replace with your own from your books. If an average cover brings $32 and its food and direct costs are $12, each cover contributes $20. With fixed costs of $14,000 a month, break-even is $14,000 ÷ $20 = 700 covers. Open 25 days and that is 28 covers a day. Now the question is not abstract: do you believe you can seat 28 people a day, every day?

Notice what this does to the way you look at a slow month. If you are at nine jobs and need fifteen, you are not simply having a bad month. You know the size of the gap, six jobs, and you can ask what it would take to close it: more leads, a better close rate, a higher price, or lower costs. A vague worry becomes a specific question, and specific questions are the ones you can act on.

What to do with the answer

Once you have the number, test it against reality. Can you deliver it? Fifteen jobs a month is only good news if you have the time and crew for fifteen jobs. Can you sell it? If you close one in four leads, fifteen jobs means sixty leads, and that is a marketing requirement you can now plan for. Break-even is a business-model number and a marketing number at once.

One warning. Break-even tells you when the business covers its costs on paper. It does not tell you when the cash arrives. A customer who pays in sixty days still leaves you paying for materials today, which is the point of Your Business Can Be Profitable and Still Run Out of Money. Know both numbers.

This week

Open the free Break-Even Calculator on the Resources page. Enter your monthly fixed costs including your own pay, your average price and your average direct cost per sale. Write down the number of sales it gives you, and beside it write how many you sold last month.

About an hour, if you already know your fixed costs and average job, and another hour if you have to work them out. The calculator is free. Then pick the one cost that would move your break-even the most if it rose, and check it every month.