Fixed costs stay the same regardless of sales, such as rent and salaries, while variable costs rise and fall with output, such as materials and commissions. Your breakeven point is the sales level where total revenue exactly covers both, so knowing all three tells you the minimum you must sell to avoid a loss.

Once you know your break-even, the next step is pricing each job to clear it with margin to spare. See how to do that without undercharging in our guide to markup vs margin for tradies.

Here is a question I ask every business owner I sit down with for the first time: do you know your break-even point? Not a rough guess — the actual number of sales or revenue you need each month before your business moves from loss to profit. Fewer than one in five can tell me. The rest are running their businesses in the dark.

That is a problem. Without knowing your break-even point, every pricing decision, every hire, every new cost you take on is a guess. You might be profitable — or you might be slowly losing money without realising it, because revenue looks healthy but costs have quietly crept up in the background.

This post is the third in Pinnacle’s business planning series. In Part 1, we worked backwards from personal income to calculate what your business actually needs to make. In Part 2, we broke down profit margins and how to improve them. Here, we tackle the foundation that makes all of that possible: understanding fixed versus variable costs, and how to use them to calculate the exact break-even point for your business.

What Are Fixed Costs?

Fixed costs are the expenses your business pays regardless of how much — or how little — revenue you bring in. Whether you make ten sales this month or ten thousand, these costs stay the same.

Common fixed costs for a Melbourne small business include:

• Rent and office or retail space
• Permanent staff salaries (including your own if you pay yourself a salary)
• Loan repayments (equipment finance, business loans)
• Insurance premiums
• Accounting, legal, and professional fees
• Software subscriptions (accounting software, CRM, marketing platforms)
• Vehicle lease payments
• Utilities and internet (if roughly consistent month to month)

Fixed costs are sometimes called “overhead.” They are the base cost of keeping your doors open. A business with high fixed costs needs to sell a lot before it starts making money — which makes break-even analysis especially important.

What Are Variable Costs?

Variable costs change in proportion to your revenue or output. The more you sell or produce, the higher these costs go. If you sell nothing, many of these costs fall close to zero.

Examples of variable costs include:

• Cost of goods sold (COGS) — raw materials, wholesale stock, ingredients
• Contractor or casual labour costs that scale with work volume
• Packaging, freight, and delivery charges
• Payment processing fees (e.g. transaction fees on card sales)
• Sales commissions tied to revenue
• Consumables used in production or service delivery

Variable costs are not inherently bad — they scale with your revenue, which is healthy. But you need to know what they are as a percentage of your revenue, because that directly affects how profitable each additional dollar of sales actually is.

Why the Distinction Matters for Your Business

Many business owners look at their expenses as a single lump sum. They see the total going out and wonder where it all goes. But mixing fixed and variable costs together makes it very difficult to make good decisions about pricing, growth, and risk.

Here is why separating them matters:

Pricing decisions

If you do not know your variable cost per sale, you cannot price correctly. Your selling price must cover your variable costs and contribute to your fixed costs before you make any profit at all. Pricing without this knowledge is guesswork.

Scaling decisions

When revenue grows, your fixed costs stay the same (up to a point), but your variable costs increase. That means each additional dollar of revenue after break-even is more profitable — a concept known as operating leverage. Understanding this helps you make smarter decisions about investing in growth.

Risk management

A business with high fixed costs and low variable costs (a consulting firm, a SaaS product) has a high break-even point but earns strong margins once it crosses that line. A business with low fixed costs and high variable costs (a product retailer) has a lower break-even but lower margins per sale. Knowing your cost structure shapes how you manage your business through slow periods.

Contribution Margin — The Number That Connects It All

Before we get to break-even, there is one more concept you need: the contribution margin.

Contribution margin is what is left from each sale after you subtract the variable costs of making that sale. It is the amount that “contributes” to covering your fixed costs — and, once fixed costs are covered, to generating profit.

Contribution Margin = Selling Price − Variable Cost per Unit

Or expressed as a percentage of the selling price:

Contribution Margin % = (Selling Price − Variable Cost) ÷ Selling Price × 100

Example: A Melbourne café sells a coffee and cake combo for $15. The variable cost (coffee, milk, cake ingredients, packaging) is $6. The contribution margin is $9 per combo, or 60%.

That 60% is not profit. It is the portion of each sale available to pay rent, wages, insurance, and every other fixed cost. Once those are fully covered, the rest becomes profit.

You may have read about profit margins in Part 2 of this series. Contribution margin and gross profit margin are related but different: gross margin looks at the whole business, while contribution margin is calculated per unit or per product line and is the key input to break-even analysis. Both matter — they just answer different questions.

What Is a Break-Even Point and How Do You Calculate It?

Your break-even point is the level of sales at which your total revenue exactly equals your total costs — you are neither making a profit nor a loss. Every sale above break-even contributes to profit.

The formula is straightforward:

Break-Even Point (units) = Fixed Costs ÷ Contribution Margin per Unit

Or if you want your break-even expressed in revenue dollars:

Break-Even Revenue = Fixed Costs ÷ Contribution Margin %

Worked example — a Melbourne café:

• Monthly fixed costs: $15,000 (rent $5,000 + permanent staff $7,000 + insurance $500 + subscriptions and other $2,500)
• Average sale value: $12 (blended across all menu items)
• Variable cost per sale: $4 (ingredients, packaging, payment processing)
• Contribution margin per sale: $12 − $4 = $8

Break-even = $15,000 ÷ $8 = 1,875 sales per month

That is roughly 63 transactions per day across a 30-day month. Everything above that number is profit territory. If the café does 2,500 transactions in a month, the profit generated is (2,500 − 1,875) × $8 = $5,000.

Notice how concrete this becomes once you have the numbers. 1,875 transactions is not an abstract accounting concept — it is a daily target the whole team can understand and work toward.

What Your Break-Even Point Tells You About Your Business

Break-even analysis is not just a one-time calculation. It is a lens you apply to every major business decision.

How many clients or sales you need before you are profitable

This alone is worth knowing. Many business owners are surprised to discover they need more sales than they thought — or they realise they are already well past break-even and have genuine room to invest in growth. If you worked through Part 1 of this series to calculate your minimum revenue target, your break-even figure now gives you the minimum number of sales to reach that target.

How a price change affects your break-even

Back to the café: if the average sale increases from $12 to $14 — through upselling, a menu refresh, or a modest price adjustment — the contribution margin rises from $8 to $10. The new break-even is $15,000 ÷ $10 = 1,500 transactions per month. That is 375 fewer sales needed each month before the business is profitable. A modest price increase can have a dramatic effect on break-even.

How adding a fixed cost changes your situation

Thinking of hiring a new team member at $3,000 per month? Your fixed costs jump to $18,000, and your break-even rises to $18,000 ÷ $8 = 2,250 sales per month — an extra 375 transactions needed before you cover the new hire. Knowing this upfront means you can model whether the additional revenue that hire is likely to generate actually justifies the cost — before you commit.

Which products or services deserve your focus

If you run multiple product lines or service offerings, calculating the contribution margin for each reveals which are doing the heavy lifting and which are dragging overall performance down. Our management accounting service includes exactly this kind of margin and break-even analysis for Melbourne business owners.

How This Series Fits Together

This three-part business planning series was designed to build on itself. Each post adds a layer to the same picture:

• Part 1: How Much Does Your Business Actually Need to Make? — Start with what you need to take home personally, work backwards through tax, and calculate your minimum revenue target. This is your destination.
• Part 2: Profit Margins Explained — What They Are and How to Improve Them — Understand the types of profit margin, why net profit margin is the one that truly matters, and what levers you can pull to improve it.
• Part 3: Fixed Costs, Variable Costs and Your Break-Even Point (this post) — Know the structure of your costs, understand your contribution margin, and calculate the exact number of sales needed before your business becomes profitable.

Together, these three frameworks give you a complete financial picture of your business. Not an accounting picture — a business owner’s picture. If you want help applying them to your specific numbers, the team at Pinnacle’s management accounting practice can walk you through the full analysis.

Frequently Asked Questions

What is the difference between fixed costs and variable costs?

Fixed costs stay the same regardless of how much you sell — rent, permanent salaries, insurance, and loan repayments are typical examples. Variable costs increase or decrease with your sales volume — cost of goods, freight, contractor labour, and transaction fees are common examples. Both must be covered by your revenue before your business makes a profit, which is why understanding each separately is so important for pricing and planning.

How do I calculate my break-even point?

Divide your total monthly fixed costs by your contribution margin per unit (selling price minus variable cost per unit). For example: fixed costs of $10,000 per month, average selling price of $50, variable cost per sale of $20 — your contribution margin is $30 and your break-even is 334 sales per month. Prefer a revenue figure? Divide fixed costs by your contribution margin percentage (60% in this example = $10,000 ÷ 0.60 = $16,667 monthly revenue to break even).

What is a contribution margin and why does it matter?

Contribution margin is the amount left from each sale after variable costs are subtracted. It “contributes” first to paying fixed costs, then to generating profit once those fixed costs are covered. A higher contribution margin means you reach break-even faster and earn more profit on every additional sale. It is one of the most important numbers in your business — and most small business owners have never calculated it.

What happens to my break-even if my fixed costs increase?

Your break-even point rises. Every new fixed cost — a new staff member, a larger premises, a new equipment lease — requires additional sales volume before you return to profitability. This is why it is important to model the impact of new fixed costs before committing to them, rather than discovering the problem months later when the numbers do not add up.

Is break-even analysis only useful for product businesses?

Not at all. Service businesses — accountants, consultants, trades, health practitioners — benefit just as much from break-even analysis. For a service business, the “units” might be client sessions, projects, or hours billed. The calculation is the same: how many billable units do you need each month to cover your fixed overhead? Once you know that number, you have a clear minimum target to plan around.

Ready to know your break-even point? Contact Pinnacle Accounting & Advisory and let us work through your numbers together.

Break even tells you the sales you need. It does not tell you the cash you need to fund the gap between paying for a job and being paid for it. For that, see our guide to working capital and the cash conversion cycle.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

Understanding your break-even is exactly the analysis a Virtual CFO in Melbourne brings each month.

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