How to Calculate Break Even

How much do you really need to earn to break even? In this video, Steve walks you through how to calculate your revenue break-even point—step by step.

You’ll learn what break-even really means, how to find it using clear formulas, and why it’s so important for pricing, planning, and profitability. With real-world examples and practical insights, you’ll walk away with tools to make smarter financial decisions and build a stronger, more resilient business.

Whether you’re just starting out or scaling fast, this is a must-know metric for lasting success.

TRANSCRIPT:

Okay, let me show you how to figure out your break-even point within your company.

If you pull an income statement, and an income statement begins with revenue, this represents the amount of income your company is bringing in by selling its products and services. Then we have COGS, which stands for cost of goods sold, also known as cost of revenue. We end up with gross margin, also known as gross profit. And then we have op-ex, which is short for operating expenses. Then we end up with operating profit.

All right, I'm simplifying here so you can just follow along and you don't get lost in the weeds.

Okay, let's say your company has $1,000 in revenue, and then cost of goods sold—all the material costs, all the labor costs, all the input costs into delivering your products and services—equals, let's just say it's $600. So that leaves you with a gross margin of $400. And then let's just assume your op-ex is 300 bucks. That leaves you with $100 in operating profit.

Now, if you want to figure out what is your breakeven revenue, this is how you do it.

First, you need to just figure out what is your gross margin as a percentage of revenue. So we're going to take 400, which is your gross margin, divided by your revenue, 1,000, and that equals 40%. So that is your gross margin or your gross profit as a percent of revenue.

Now, we're going to take your overhead. These are your fixed costs. So we have $300, and we are going to divide that by the 40%, which is 0.4. All right, let me pull out my handy dandy nerdy calculator out of my pocket. And I'm going to take 300 divided by 0.4, and that equals $750. And that is my breakeven point.

In other words, I have to sell $750 worth of goods and services in order to breakeven, in order to have $0 in operating profit. And this is really important to understand in your business, because as sales fluctuate, you want to understand what you have to do on the top line in order to just breakeven, to cover your cost.

Now, here's something really cool. Here's a little bonus thing that you're going to want to pay attention to.

What if your profit margin, instead of 40%, is 30%? All right, so it's 0.3%. I'm going to take $300, and I'm going to divide that by 0.3, and that equals $1,000, meaning you have to do $1,000 in revenue just to breakeven.

And this is where it's really important to understand how financial statements work. That's why I'm always talking about understanding the story behind the numbers, because just this example right here, if you are not operating efficiently, if you're not earning the gross margin that you should be earning—my pen's out, so I'm going to switch pens here—if you're not earning the margin that you should be earning, you're going to have to put in so much more work.

I mean, just in this example, you're going to have to earn $250 more of revenue just to make up for your inefficiencies up here and cost of goods sold. And who wants to do that? Who wants to work harder to get to the same place?

I mean, I don't, I'm sure you don't either.

So here's the deal. If your gross margin is low, and if it's below industry average, here are three ways to increase your gross margin.

Number one, you can do more volume. So you could just increase the top line, and that's what I showed you down here. You could do more sales. So you could go out there, sell more, hustle more, and just bring in more revenue. And assuming your costs stay the same, you'll be able to increase your gross margin, right? That's one way—not the most desirable way—but definitely one way.

The next way is to increase your price. So you can raise your prices on your products and services.

Now here's the deal. You can't just raise your prices unless you're undervalued already in the market, but you can't just raise your prices without also increasing the perceived value that your customers are going to get. Because if you do that, you're going to lose customers.

Because remember, when price exceeds value, customers don't buy. When value exceeds price, customers buy.

So you can increase your price.

The next thing you could do is achieve cost efficiencies. So you lower your cost.

These are the three ways you can improve your gross margin.

All right. So now you have to ask yourself and relate this to your business.

Okay. What would it take for you to increase your volume, to increase sales? Do you need to hire another business development person or more sales reps or change your script or redo your website or, you know, fine tune your value proposition or narrow in on your ideal customer profile and just strengthen your overall market focus and position?

Sure. You could do that, right? But these are the strategies or the tactics you can pursue in order to increase your volume.

What about price? How do you increase your price? Well, you can strengthen your brand. You can improve your perceived quality. You can enhance the customer experience. There are all these things that you could do once again, to achieve price premiums.

And then what about cost efficiencies?

You can achieve this through economies of scale or by implementing technology or changing your operating model or through technology or eliminating all the noise, right? All the crap that you do in your business. You can do that in order to achieve cost efficiencies.

So these are the three ways to improve this.

But what I wanted to do mostly in this video is to walk you through how to figure out your break even point. And if you build a table out—so I did that once—I built a table out with my gross margin going down the line, and then I broke out how much revenue I needed to do on this axis.

So here I had my gross margin, and then I figured out at all different ranges, like how much gross margin if I do on this side, what does that equate to break even revenue? And it's pretty surprising. And you can do the same thing in your business.

But the key is, it's like we want to work smarter and harder and figuring out your break even point. And then also at the same time, figuring out how to increase your gross margin is just going to continue to lower that minimum threshold that you need to meet in order to cover all your bills.

Does this make sense to you? If so, can I get a yes in the comments box below?

Also, I'd love your feedback. What other types of topics do you want me to cover? Because I'm here to support you along your journey.

This is really important. Increasing your financial literacy will make all the difference in the world when it comes to your business. So drop your comments below. That'd be extremely helpful for me as I plan out the schedule for the next series of videos.

In the meantime, make sure you subscribe and share. And if you need anything, please reach out. In the meantime, you can find my information down below in the description.

All right, take care of yourself. Cheers.