Key takeaways
- Break-even is the sales figure at which you cover every cost and make neither profit nor loss. Break-even sales = fixed costs / gross margin %.
- Your gross margin must be your real, blended margin across everything you sell, not the margin on your favourite product.
- Divide the monthly figure by the days you open to get a daily target you can check at closing time.
What break-even means
Your shop has costs that arrive whether you sell anything or not: rent, wages, power, licences. The break-even point is the amount of sales at which the money left after paying for the goods exactly covers those costs. Below it you lose money. Above it, you make a profit.
It is one of the most useful numbers a shop owner can know, because it turns a vague worry ("are we doing OK?") into a concrete target ("we need $X by the end of the month").
Step 1: add up your fixed costs
Fixed costs are the ones that do not change with sales in a normal month. Write each one as a monthly amount.
- Rent or mortgage
- Wages, including any you pay yourself
- Power, water, internet and phone
- Insurance and licences, divided by 12
- Loan repayments
- Software, security and cleaning
- Accounting and bank fees
Include a wage for yourself. Many owners leave it out and think the shop is profitable when it is only paying them nothing. Leave out the cost of stock, which belongs in the margin, not here.
Step 2: find your gross margin
Gross margin is the share of each sale left after paying for the goods. If you sell something for $10 that cost you $7, the gross profit is $3 and the margin is 30%. See gross profit for shop owners and the difference between margin and markup in how to price products.
Use your blended margin: total gross profit divided by total sales over a typical month. A shop that sells low-margin phone credit and high-margin accessories has a very different blended margin from either one alone. Your sales and profit report gives you this number. If you do not have one, you can estimate it from a sample week.
Step 3: the formula
Why it works: each dollar of sales contributes the margin percentage towards fixed costs. If the margin is 25%, each $1 of sales gives 25 cents. You need enough dollars of sales for those cents to add up to your fixed costs.
A worked example
A corner shop has these monthly fixed costs.
| Cost | Per month |
|---|---|
| Rent | $1,200 |
| Wages (two staff) | $1,800 |
| Owner's pay | $1,000 |
| Power, water, internet | $350 |
| Insurance and licences | $100 |
| Other | $150 |
| Total fixed costs | $4,600 |
Last month, the shop had sales of $16,000 and gross profit of $4,000. The blended gross margin is 4,000 / 16,000 = 25%.
Break-even sales = 4,600 / 0.25 = $18,400 a month.
That is $2,400 more than the shop sold last month. So it lost $600: 25% of $16,000 is $4,000 of gross profit, minus $4,600 of fixed costs. Check with the formula: at $18,400, 25% is $4,600, which exactly covers the costs. The shop is $2,400 short of break-even.
Turn it into a daily target. If the shop opens 26 days a month, $18,400 / 26 = $708 a day. Now the owner can look at the till each evening and know whether the day helped or hurt.
What to do if you are below break-even
There are only three levers. Sell more, earn more on each sale, or cost less to run. See how each moves the example.
| Change | Fixed costs | Margin | Break-even sales | Result |
|---|---|---|---|---|
| Starting point | $4,600 | 25% | $18,400 | Short by $2,400 |
| Margin rises to 28% | $4,600 | 28% | $16,429 | Short by about $429 |
| Cut other costs by $300 | $4,300 | 25% | $17,200 | Short by $1,200 |
| Both together | $4,300 | 28% | $15,357 | Above break-even by about $643 |
A three-point rise in margin is worth more than a $300 cut in costs, and it does not need more customers. You get there by repricing, buying better, selling more of what has higher margin, and reducing loss and expiry. See reduce stock loss and increase your average sale.
Pushing hard on sales volume alone is the hardest lever. In the example it needs 15% more sales.
Limits of the number
- It is an estimate. Margins shift as your product mix does.
- Seasons matter. Use a monthly figure for a normal month, and check busy and quiet months separately.
- It ignores cash timing. Break-even does not tell you if you can pay the bills on Friday. See cash flow for shop owners.
- It is before tax. Ask an accountant how tax applies to your profit.
- Sales tax is not revenue. If you charge GCT or VAT, use sales before tax, because that money belongs to the tax authority.
Review the number whenever rent, wages or your margin changes.
How Shopkeepa helps
The two inputs you cannot guess are your blended margin and your actual daily sales. Shopkeepa's reports show sales by day, week and month and gross profit where costs are entered, so both numbers are close to hand. It is in development: join the early access list. See sales and profit reports.
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