What is a Break-Even Analysis?

A break-even analysis is a financial calculation used to determine the exact moment your total revenue equals your total expenses. At this point, your profit is exactly $0. You aren’t losing money, but you haven’t started “taking home” a profit yet.

Every unit sold after you hit this point contributes directly to your bottom line. In U.S. accounting standards (GAAP), we break this down into three primary components:

• Fixed Costs: Expenses that stay the same regardless of how much you sell (e.g., rent, insurance, administrative salaries).
• Variable Costs: Expenses that fluctuate directly with production volume (e.g., raw materials, packaging, credit card processing fees).
• Contribution Margin: The amount of money left over from a single sale after paying the variable costs. This is the money that “contributes” to paying off your fixed overhead.