Calculate your break-even in 4 steps
After financial ratio analysis you know whether your month improved, but one question remains that every owner asks before a decision: how much must I sell each month to avoid a loss? That is the break-even point: the sales that cover all costs with no profit and no loss. Calculate it from your monthly income statement in 4 steps: split costs into fixed and variable, calculate the contribution margin ratio, then break-even sales, then your margin of safety and how any new decision moves it.
Example: the caterer in September
We stay with the same caterer. Its approved September income statement: revenue SAR 208,000, total costs SAR 172,400, and net profit SAR 35,600. The question now: if sales drop, at what figure does that profit disappear?
Step 1: classify every cost as fixed or variable
A variable cost rises and falls with sales; a fixed cost is paid even if you sell nothing. Ask of each line: if we served no banquet this month, would we still pay it?
| Line | Type | September (SAR) |
|---|---|---|
| Food ingredients | Variable | 78,000 |
| Hourly banquet staff (part of kitchen wages) | Variable | 8,000 |
| Delivery fuel | Variable | 5,300 |
| Fixed kitchen salaries | Fixed | 24,000 |
| Admin salaries | Fixed | 28,000 |
| Rent | Fixed | 15,000 |
| Power, water, maintenance, depreciation, marketing and bank charges | Fixed | 14,100 |
Totals: variable costs SAR 91,300, fixed costs SAR 81,100. Power moves a little with activity, but most of it is paid regardless, so we treated it as fixed. What matters is using the same classification every month so you can compare.
Step 2: calculate the contribution margin ratio
The contribution margin is what remains of each riyal of sales after variable costs; it covers the fixed costs and then becomes profit. Revenue 208,000 − variable 91,300 = SAR 116,700. The ratio: 116,700 ÷ 208,000 = 56.1%. Each riyal the kitchen sells leaves about 56 halalas to cover fixed costs.
Step 3: calculate break-even sales
Break-even sales = fixed costs ÷ contribution margin ratio = 81,100 ÷ 56.1% = about SAR 144,500 a month. Quick check: 144,500 × 56.1% gives a margin close to 81,100, leaving neither profit nor loss. Every riyal of sales above that figure leaves 56 halalas of profit, and any month below it loses money.
Step 4: calculate the margin of safety and test decisions
The margin of safety is the distance between actual sales and break-even: 208,000 − 144,500 = about SAR 63,500, or 30.5% of sales. Monthly sales could fall by nearly a third before losses begin. Then use the same calculation before any decision: each new fixed cost needs extra sales equal to that cost divided by the margin ratio.
Running it from WhatsApp
Owner (4 October): I want to hire a second cook at 9,000 a month. How much more do we need to sell so it does not eat the profit?
System: September's contribution margin ratio is 56.1%. A salary of 9,000 needs about SAR 16,000 of extra monthly sales to cover itself, raising break-even from about 144,500 to about SAR 160,500.
Owner: And what were our sales for the last 3 months?
System: July 184,000, August 196,000, September 208,000. All are above the new break-even, and the lowest leaves a margin of safety of about 13%.
Owner: Fine, let's hire him
The owner needed no spreadsheet, just one question and figures from approved statements. More on running your business from WhatsApp.
Checklist before you rely on the break-even point
- Did you take the figures from an approved income statement after month-end close?
- Did you classify every line and separate fixed wages from variable banquet staff?
- Did you exclude owner's drawings and loan principal from costs?
- Did you keep the same classification every month so break-even is comparable?
- Did you recalculate after any change in prices, rent or salaries?