What is a break-even point?

Definition

The break-even point is the sales figure where the period's revenue and the period's costs land on the same number. On the books, operating income at that level is exactly zero.

A scoop shop gets there when the week's cups have paid the rent, the wages, and the dairy, with nothing left over. One more scoop starts profit; one fewer scoop leaves the month short.

Accrual books use the period's recorded sales and recorded costs, not only the cash that moved. Cash-basis books can show a different count if rent was prepaid or a dairy bill is still open.

This figure is a sales level, in dollars or in units. It is not a ledger account, and it is not a line on the Balance Sheet.

Where it shows up

P&L: Related to the sales level where operating income is exactly zero.

Balance Sheet: Related to the fixed-cost obligations that must be covered first.

See also: Contribution Margin · Fixed Costs · Margin Of Safety

When you look at your Income Statement, you will not see a printed break-even line. You see revenue, the costs that move with each scoop, the bills that stay put, and operating income at the bottom of that block.

If operating income is zero, the shop is at the point this month. If it is positive, sales sat above the point; if it is negative, sales sat below it.

The Balance Sheet does not list the figure. Related amounts show up as current liabilities and prepaid occupancy that still have to be covered before a month can clear.

On the Statement of Cash Flows, paying rent and buying dairy are the cash events. The break-even count itself does not move cash; it is a reading of the Income Statement.

Inventory of mix and cones sits in current assets until a scoop is sold. Those dollars join the moving costs only when they leave with the cup.

How it works

The shop first adds up the bills that stay put for the period. Rent, insurance, and salaried counter pay are the usual start.

It then finds what is left of each sale after the costs that move with the scoop. A $6 cup that takes $3 of mix, cone, and cup leaves $3 to cover the bills that stay put.

Divide the bills that stay put by that leftover per scoop. The result is the number of scoops the shop must sell before the month is covered.

The same math in dollars is leftover as a percent of sales, then the stay-put bills divided by that percent. Both routes should land on the same sales figure if the mix is consistent.

If the leftover per scoop shrinks, the shop needs more scoops to cover the same rent. If rent rises and the leftover holds, the shop also needs more scoops.

Cost of goods sold is where the mix and cones usually land. Those moving costs have to be subtracted before you know what each scoop can send toward rent.

Example

Pine Street Scoops sells one size of cup for $6. Mix, cone, and cup cost $3, so $3 of each sale is left to cover the bills that stay put.

Monthly rent, insurance, and salaried counter pay total $9,000. Those bills do not move with the day's line.

Break-even in scoops is $9,000 divided by $3, or 3,000 cups. In dollars that is 3,000 times $6, or $18,000 of sales.

At 3,000 cups, sales are $18,000, moving costs are $9,000, and the stay-put bills are $9,000. Operating income is zero.

At 2,400 cups, sales are $14,400. After $7,200 of mix and $9,000 of rent and pay, the month is short $1,800.

At 3,600 cups, sales are $21,600. After $10,800 of mix and the same $9,000, operating income is $1,800.

Pine Street does not post a line that says "break-even." The books post sales, cost of goods sold, rent, and wages; the point is the sales level where those lines cancel.

Common mix-ups

The break-even point is not the same thing as cash in the till. A month can clear on the Income Statement and still be tight if rent was prepaid or dairy is paid late.

The break-even point is not a ledger account. You do not debit or credit it when the 3,000th cup goes out.

The break-even point is not the same thing as a sales goal. A goal can sit well above the point; the point is only where the month stops being short.

Related terms

• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Fixed Costs: Costs that stay roughly the same regardless of sales volume.
• Variable Costs: Costs that rise and fall directly with sales volume.
• Margin Of Safety: How far sales can fall before the business drops below break-even.
• Operating Income: Profit from core operations before interest and taxes.
• Pricing: The set price charged to customers for a product or service.
• Scenario Planning: Modeling several plausible futures to see how the numbers hold up.
• Revenue: The total value of goods and services the business earned in a period.