Breakeven Analysis — How To Know Exactly When Your Business Starts Making Money

Breakeven Analysis — How to Know Exactly When Your Business Starts Making Money

Okay so every small business owner has this one question somewhere in their head.

Am i actually making money? Or am i just staying busy?

And honestly its a fair question. Because a lot of small businesses are running, generating revenue, keeping themselves occupied — but never really crossing that point where they're actually profitable. They just dont know where that point is.

Thats exactly what breakeven analysis helps you find out.

Lets understand this with a real example. A simple one.

Meet Prateek — Who Opened a Cafe and Had No Idea if He Was Making Money

Prateek opened a small cafe in Pune about a year back. Nice place, decent footfall, people seemed to like the coffee. But at the end of every month he was always a little confused about whether he was actually making a profit or just breaking even or maybe even losing money.

He sat down with his CA one afternoon and said — bhai mujhe samajh nahi aa raha. Sales ho rahi hain but paise kahan ja rahe hain?

His CA took out a piece of paper and explained it with three simple concepts. Fixed costs, variable costs and contribution margin.

Lets go through each one.

Fixed Costs — The Bills That Come Whether You Sell or Not

Fixed costs are expenses that stay the same every month no matter how much business you do.

For Prateeks cafe these were —

• Rent — ?40,000 per month
• Staff salaries — ?35,000 per month
• Electricity and internet — ?8,000 per month
• Loan EMI for equipment — ?12,000 per month

Total fixed costs — ?95,000 per month.

Whether Prateek sells 10 cups of coffee or 1000 cups — these bills are coming every single month. Fixed. Dont change.

Variable Costs — The Costs That Go Up When Sales Go Up

Variable costs are directly linked to how much you sell. More sales means more variable costs. Less sales means less.

For Prateeks cafe the variable costs per cup of coffee were —

• Coffee beans and milk — ?18
• Packaging and disposables — ?5
• Other ingredients — ?7

Total variable cost per cup — ?30

So every time Prateek sells one cup of coffee it costs him ?30 to make it.

Contribution Margin — The Number That Actually Matters

Now here's where it gets interesting.

Prateek sells his coffee at ?80 per cup. His variable cost per cup is ?30. So every cup he sells gives him ?50 that goes towards covering his fixed costs.

That ?50 is called the contribution margin. Its the contribution each sale makes towards covering fixed costs and eventually generating profit.

Contribution Margin = Selling Price minus Variable Cost
= ?80 minus ?30 = ?50 per cup

So What is the Breakeven Point?

The breakeven point is simply — how many cups does Prateek need to sell every month just to cover all his fixed costs? Not make a profit. Just not lose money.

The formula is simple —

Breakeven Point = Fixed Costs divided by Contribution Margin per unit
= ?95,000 divided by ?50
= 1,900 cups per month

So Prateek needs to sell 1,900 cups of coffee every single month just to break even. Every cup after that is pure profit of ?50.

That works out to roughly 63 cups a day assuming the cafe is open all 30 days.

When his CA showed him this number Prateek immediately knew — some days he was hitting 80 cups. Some days only 40. On the 40 cup days he was losing money. And he had never realised that before.

How Does This Help With Pricing and Margin Decisions?

This is where breakeven analysis becomes really powerful for small businesses.

Lets say Prateek is thinking of running a discount offer — selling coffee at ?65 instead of ?80 to attract more customers.

Sounds like a good idea right? More customers, more sales.

But lets check the numbers first.

New contribution margin = ?65 minus ?30 = ?35 per cup

New breakeven point = ?95,000 divided by ?35 = 2,714 cups per month

So just by dropping the price by ?15 Prateek now needs to sell 814 more cups every month just to break even. Thats almost 27 extra cups every single day.

Is that discount going to bring in that many extra customers? Probably not.

This is exactly the kind of decision breakeven analysis saves you from making blindly.

The Simple Takeaway

Every small business owner should know three numbers —

• What are my fixed costs every month?
• What does it cost me to deliver one unit of my product or service?
• How many units do i need to sell just to break even?

Once you know these three numbers you stop guessing. You start making decisions based on actual data. Pricing decisions, discount decisions, expansion decisions — all of them become much clearer.

And honestly calculating this doesnt require any fancy software or complicated accounting. A piece of paper and basic math is enough to start.

Want to figure out your breakeven point or need help understanding your cost structure? Our team at Ca Dhiraj Ostwal & Co. can sit down with you and work it out properly — reach out anytime.