The Break-even point (BEP) refers to a company’s break-even point. At this point, the revenue generated covers all costs taken into account, meaning that neither a profit nor a loss is made. It can be expressed, for example, as the required sales volume, revenue level or point in time.
This key figure is particularly important for start-ups because it shows the point at which a business model breaks even, based on the underlying assumptions.
What factors influence the break-even point?
The break-even point depends on how high a company’s costs are and what revenue it generates.
Four factors are particularly important:
- Fixed costs: Costs that are incurred regardless of sales volume, such as rent or fixed salaries.
- Variable costs: Costs that vary with the quantity sold, such as material or production costs.
- Selling price: The amount that customers pay per product or service.
- Sales volume: The number of products or services a company sells.
The higher the selling price, whilst costs remain the same, the quicker the company can reach its break-even point.
If, on the other hand, fixed costs or variable costs rise, it often has to sell more.
How is the break-even point calculated?
For a single product with a constant selling price and constant variable unit costs, the required sales volume can be calculated easily.
Break-even quantity = fixed costs ÷ (selling price per unit − variable costs per unit)
The difference between the selling price and the variable unit cost is called Contribution margin per unit.
This amount is available to cover fixed costs. Once the total contribution margins equal the fixed costs, the company reaches the break-even point.
Example from a B2B start-up
A start-up is selling a hardware solution it has developed in-house for monitoring industrial plants.
The team is planning the following figures for one month:
| Position | Amount |
|---|---|
| Monthly fixed costs | 20.000 € |
| Selling price per unit | 1.000 € |
| Variable costs per unit | 600 € |
| Contribution margin per unit | 400 € |
The calculation is as follows:
€20,000 ÷ €400 = 50 units
The start-up must therefore sell 50 devices a month to cover its estimated monthly costs.
If it sells more units, a profit is made under these simplified assumptions. If, however, sales fall below 50, the company operates at a loss.
Why is the break-even point important for start-ups?
Break-even analysis helps entrepreneurs to better assess the profitability of their business model.
In particular, it supports the following decisions:
- Sales planning: What sales volume is required to cover costs?
- Pricing: How do higher or lower prices affect the break-even point?
- Cost management: Which expenses have a particularly significant impact on profitability?
- Investment planning: When can additional investment be financially worthwhile?
- Financial planning: What turnover does the company need to achieve in the long term?
Particularly in the early stages of a business, these insights can help to set realistic growth targets.
However, the calculations are often based on simplified assumptions. Start-ups should therefore regularly check whether their actual costs and sales volumes are in line with expectations.
What is the difference between break-even and liquidity?
A company breaks even when its recognised revenue covers its costs.
The Liquidity By contrast, it describes whether the company is able to meet its payment obligations as they fall due.
Both indicators are related, but they are not identical.
For example, a start-up may already be breaking even but still face liquidity problems if customers pay their invoices late.
That is why founders should regularly monitor not only their profitability but also their actual cash inflows and outflows.
What mistakes should start-up founders avoid?
A common mistake is to fail to take important costs into account when carrying out the calculation.
Furthermore, start-ups should not automatically assume that selling prices and variable costs will remain constant in the long term.
Where there are several products with different contribution margins, a simple unit-based formula is often insufficient. In such cases, a more detailed calculation is required.
It is therefore advisable to run through various cost and revenue scenarios and to update the financial planning on a regular basis.
How can innoWerft help with this?
innoWerft helps founders to carry out a financial assessment of their business models, estimate their funding requirements and develop realistic growth strategies. Through coaching, start-ups can review their cost structures and revenue projections and refine their financial planning in a targeted manner.
Frequently Asked Questions about the Break-even Point
What does ‘break-even point’ mean in German?
The term refers to the break-even point or the point at which costs are covered. It denotes the point at which the relevant revenue and costs are equal.
What happens once the break-even point has been reached?
If turnover rises above the break-even point and the underlying cost assumptions remain valid, the company will make a profit.
Is the break-even point the same as profitability?
Not quite. At the break-even point, there is still no profit. Only once a company exceeds this threshold does it operate profitably, based on the relevant assumptions.
Can a start-up experience liquidity problems even though it has broken even?
Yes. For example, late payments from customers or large capital expenditure outlays can result in there not being sufficient cash available.
innoWerft is an early-stage investor and accelerator based in Walldorf, supporting start-ups before or shortly after they are founded by providing capital, coaching and access to a network of investors and businesses to foster sustainable growth.
Would you like to take your start-up to the next level and find out more about innoWerft? Apply now for the Open Pitch.