The break-even point (BEP) is the level of sales at which a business's total revenue equals its total costs — zero profit, zero loss. Below break-even, the business loses money; above it, the business generates profit. BEP = Fixed Costs ÷ (Price per Unit − Variable Cost per Unit).
Break-even analysis divides costs into two categories: fixed costs (rent, salaries, insurance, debt payments — costs that don't change with volume) and variable costs (raw materials, direct labor, transaction fees — costs that scale with each unit sold). The contribution margin per unit is the selling price minus the variable cost per unit — the amount each sale contributes toward covering fixed costs and generating profit. The break-even formula: BEP (in units) = Fixed Costs / Contribution Margin per Unit. BEP (in revenue) = Fixed Costs / Contribution Margin Ratio, where Contribution Margin Ratio = (Price - Variable Cost) / Price. Practical applications: (1) Pricing decisions — if your break-even requires 1,000 units at $100 and you can only sell 600, you need to either raise price, cut costs, or reassess. (2) Loan sizing — a lender wants to know your break-even to assess whether projected revenue after the loan can reliably cover debt service. (3) New product/service launch — before launching, estimate how many units need to sell to cover launch costs. (4) Staffing decisions — adding a $60,000 employee requires enough incremental revenue to cover that cost and maintain profitability. For SBA loan applications: borrowers often include break-even analysis in their business plan. The SBA's SBDC network (https://www.sba.gov/local-assistance/resource-partners/small-business-development-centers-sbdc) offers free break-even analysis assistance through local counselors. Lenders review break-even to assess how close to the margin the business operates — higher break-even relative to revenue = less cushion.
Lenders want to see that projected post-loan revenue will cover both operating costs and new debt service. Break-even analysis shows at what revenue level the business covers its costs. If your break-even already requires 90%+ of historical revenue, adding debt service pushes it higher — leaving little cushion for revenue fluctuation. Strong loan applications show break-even well below average revenue, demonstrating cushion.
Contribution margin (CM) is the selling price minus variable cost per unit — the amount each sale contributes to covering fixed costs and generating profit. A product selling for $100 with $60 in variable costs has a $40 CM. Contribution margin ratio (CM%) = CM / selling price. Higher CM% means each dollar of revenue covers more fixed cost — the business reaches break-even on fewer sales.
A new loan adds to fixed costs — monthly principal and interest payments are mostly fixed obligations. Break-even rises by: new monthly debt service / CM ratio. A $50,000 loan at 7% over 5 years adds ~$990/month in debt service. At a 40% CM ratio, break-even rises by ~$2,475/month in additional revenue needed. Break-even analysis helps size loans to what the business's cash flow can actually support.