At DISSAU we've helped hundreds of entrepreneurs legalize their businesses and go to market. And as we analyze how many of those businesses evolve —ones we've walked alongside practically from day one— we've noticed several key factors that limit growth and, little by little, kill off many of these companies.
Let's start with a question: how do you know your business is profitable?
For many, profitability = income − expenses. If the result is negative, there are losses; if positive, there are profits. And yet, a huge number of entrepreneurs don't really know whether they're making or losing money. Out come the excuses —slow season, bad luck, "the market is tough"— to justify a poor read on the real state of the business.
Today I want to give you a formula that goes well beyond a simple subtraction. With it, you'll know exactly how much you need to sell to hit your break-even point.
What is the break-even point?
It's your business's zero moment over a period of time: where you haven't lost anything, but you haven't gained anything either. It's the line that tells you that, from there on, you start making money —and below it, you're at a loss.
Knowing where that line is changes everything: you stop operating blind and give each month a clear first target.
An example with a pizzeria 🍕
Imagine you own a pizzeria (I love pizza). The first thing is to clearly separate two types of costs.
1. Your fixed costs
These are what you pay every month whether you sell a lot or a little:
| Monthly fixed cost | Amount |
|---|---|
| Rent | $1,200 |
| Utilities (water, internet, power, HVAC) | $680 |
| One helper | $2,200 |
| Marketing | $650 |
| Insurance, licenses and equipment | $2,100 |
| Total | $6,830 |
2. Selling price and unit cost
- Selling price: what you charge for one unit. Let's say each pizza sells for $30.
- Unit cost: what it costs to produce one unit —ingredients, packaging, direct labor. Let's say each pizza costs you $15.
The formula
Plugging in the pizzeria's numbers:
pizzas a month. That is: $6,830 ÷ ($30 − $15) = 455.3, which we round up because you can't sell half a pizza.
You need to sell at least 456 pizzas to cover all your costs. Everything you sell from pizza 457 on is profit. 💵
Try it with your own numbers
Swap in your business's values and watch your break-even point move:
Your break-even point
456
units per month · $13,680 in sales
From the next unit on, everything you sell is profit.
What this changes
When I understood this formula, I started seeing my business differently. Everything got easier, because I finally knew the month's first goal: my break-even point. The faster I reached it, the more days of the month were pure profit.
This is, in essence, what separates a business from a hobby: a business knows exactly where it stands. Knowing your break-even point is one of the clearest differences between the businesses that make it past their early years and the ones that don't.
In upcoming posts I'll keep sharing data and tools that have helped me, as a Latino immigrant in the United States, build a profitable business in the heart of Silicon Valley.
Your break-even point is only as good as your numbers. At DISSAU we keep your bookkeeping current so you know your fixed costs and your real unit cost —and make every decision on data, not on hunches. Talk to a specialist.
