A break-even analysis answers the question every owner asks in a slow month: how much do we actually need to sell just to cover our costs? Most owners have a rough feel for it. Few have the number written down, and fewer still know how it changed after the last wage increase, rent escalation or electricity hike.
That matters, because the break-even point moves every time your costs or prices move. If you don’t track it, you can grow sales and still end up with less profit.
This guide walks you through the formula, a full Rand example, what happens when costs and prices change, and how to use the number in everyday decisions.
What is a break-even analysis?
Your break-even point is the level of sales where total income equals total costs. At that point you make neither a profit nor a loss. Every Rand of contribution above it becomes profit, and every Rand below it is a loss.
A break-even analysis works out that point, and then asks what moves it. It’s part of what accountants call cost-volume-profit (CVP) analysis. The ACCA’s technical guide to CVP analysis covers the theory in depth, but you only need three numbers to use it well.
- Fixed costs: Costs that stay roughly the same whatever you sell, such as salaries, rent, insurance, software and loan repayments.
- Variable costs: Costs that rise and fall with each sale, such as materials, stock, packaging, commission, delivery and card fees.
- Selling price: What you charge per unit, excluding VAT if you’re VAT-registered.
The gap between selling price and variable cost is your contribution. It’s the amount each sale contributes towards fixed costs, and then towards profit.
The break-even formula (units and Rand)
There are two versions. Use the unit version if you sell a small range of similar products. Use the revenue version if you sell many products or services.
| What you want to know | Formula |
|---|---|
| Contribution per unit | Selling price − variable cost per unit |
| Break-even point in units | Fixed costs ÷ contribution per unit |
| Contribution margin ratio | Contribution ÷ selling price (or total contribution ÷ total sales) |
| Break-even point in Rand | Fixed costs ÷ contribution margin ratio |
| Margin of safety | (Actual or budgeted sales − break-even sales) ÷ actual or budgeted sales |
| Sales needed for a target profit | (Fixed costs + target profit) ÷ contribution margin ratio |
The margin of safety is the one many owners skip. However, it’s often the most useful, because it tells you how far sales can fall before you start losing money.
Break-even analysis example in Rand
Picture a Cape Town furniture maker that sells a standard office desk to corporate clients. The numbers below are illustrative, and all prices exclude VAT.
- Selling price per desk: R4,500
- Variable cost per desk (timber, hardware, finish, delivery): R2,700
- Contribution per desk: R1,800
- Monthly fixed costs (salaries, rent, insurance, electricity, admin): R216,000
So the maths works like this:
- Break-even in units: R216,000 ÷ R1,800 = 120 desks a month.
- Contribution margin ratio: R1,800 ÷ R4,500 = 40%.
- Break-even in Rand: R216,000 ÷ 40% = R540,000 a month.
- Margin of safety: If the business sells 140 desks (R630,000), then (R630,000 − R540,000) ÷ R630,000 = about 14%.
- Target profit: To make R60,000 profit a month, it needs (R216,000 + R60,000) ÷ 40% = R690,000 in sales, or about 154 desks.
In other words, the first 120 desks each month simply keep the lights on. Desk number 121 is the first one that makes money.
What moves your break-even point
The real power of a break-even analysis is the “what if”. Here’s how the same desk business changes when one thing moves at a time.
| Scenario | Contribution per desk | Monthly fixed costs | Break-even desks | Break-even sales |
|---|---|---|---|---|
| Base case | R1,800 | R216,000 | 120 | R540,000 |
| Fixed costs up 5% (wages and rent) | R1,800 | R226,800 | 126 | R567,000 |
| Timber cost up R200 a desk | R1,600 | R216,000 | 135 | R607,500 |
| Price up 5% to R4,725 | R2,025 | R216,000 | 107 | R504,000 |
| 10% discount to R4,050 | R1,350 | R216,000 | 160 | R648,000 |
Look at the last row. A 10% discount means selling 40 more desks just to stand still. That’s why discounting is so expensive, and why our guide to pricing strategy for small business spends so much time on protecting margin.
Meanwhile, the price increase row shows the opposite effect. A modest 5% increase cuts the break-even point by 13 desks a month.
South African cost pressures to build in
Costs rarely stand still in South Africa. For example, Eskom’s NERSA-approved tariffs rose by an average of 8.76% for direct customers from 1 April 2026, and by 9.01% for municipal bulk purchases from 1 July 2026. Most businesses on municipal supply will feel a similar increase from July.
General prices keep climbing too. Stats SA reported annual consumer inflation of 4.4% in August 2026. So if you haven’t recalculated your break-even point since last year’s budget, it’s almost certainly higher than you think.
Do you know your break-even point for this month, not last year? Take the free Business Health Check. It takes about 3 minutes and shows how your financial health and visibility compare with the other areas of your business.
Break-even for businesses that sell many products
Most SMEs don’t sell one desk. They sell dozens of products or a mix of services. In that case, work with total figures from your management accounts instead of units.
Take a typical Joburg commercial bakery. Last quarter it averaged R1.2 million in monthly sales. Its variable costs (ingredients, packaging, delivery fuel and card fees) came to 55% of sales, so its contribution margin ratio was 45%. Fixed costs were R486,000 a month.
- Break-even sales: R486,000 ÷ 45% = R1,080,000 a month.
- Margin of safety: (R1,200,000 − R1,080,000) ÷ R1,200,000 = 10%.
- Monthly profit: (R1,200,000 × 45%) − R486,000 = R54,000.
A 10% margin of safety is thin. One lost café chain, or one bad month of load-shedding costs, could push the bakery into a loss.
There’s a catch, though. As ACCA’s guide points out, this method assumes your sales mix stays constant. If customers shift towards low-margin products, the real break-even point rises even when total sales hold steady. Check your mix monthly, and our guide on how to read a profit and loss statement shows where to find these numbers.
How to use break-even analysis in real decisions
Once you have the number, use it. Here are the decisions where it earns its keep.
- Hiring: A new R35,000-a-month employee at a 40% contribution margin needs R87,500 in extra monthly sales to pay for themselves.
- Pricing and discounts: Before agreeing to a big discount, calculate how much extra volume it needs.
- New premises or equipment: Add the extra rent or finance cost to fixed costs and see where break-even lands.
- Cost cutting: Compare cutting fixed costs with improving contribution. Our guide to cost reduction strategies covers which cuts protect growth.
- Cash planning: Break-even is about profit, not cash. You can be above break-even and still run short if customers pay late.
That last point is common. Xero’s 2026 State of South African Small Business report found that 62% of the 427 businesses surveyed had cash flow issues over the past year, even though 80% reported revenue growth. Growth above break-even doesn’t guarantee cash in the bank.
A note on VAT
If you’re VAT-registered, always use VAT-exclusive prices and costs, because the VAT isn’t yours. If you aren’t registered, the VAT you pay suppliers is a real cost, so include it. SARS raised the compulsory VAT registration threshold from R1 million to R2.3 million in annual turnover from 1 April 2026 (as at September 2026; check SARS for current rules). If you’re about to cross it, rerun your numbers.
Frequently asked questions
What is the formula for break-even analysis?
Break-even in units equals fixed costs divided by contribution per unit, where contribution is selling price minus variable cost. Break-even in Rand equals fixed costs divided by the contribution margin ratio, which is contribution divided by selling price. For example, R216,000 fixed costs and a 40% margin give break-even sales of R540,000.
What is a good margin of safety for a small business?
There’s no single rule, but many advisors are comfortable at 20% or more. Below about 10%, a small drop in sales or one lost client can push the business into a loss. Seasonal businesses and those with a few large customers usually need a bigger margin of safety than businesses with steady, spread-out sales.
How often should I update my break-even point?
Update it at least quarterly, and whenever a major cost or price changes, such as annual wage increases, rent escalations, electricity tariff increases or a new price list. Many owners track it monthly alongside management accounts, because it shows at a glance whether the month’s sales are covering the business’s fixed costs.
What are the limitations of break-even analysis?
It assumes costs split neatly into fixed and variable, prices stay constant and the sales mix doesn’t change. In reality, some costs are semi-variable and discounts vary. It also measures profit, not cash, so a business above break-even can still run short if customers pay late. Use it as a guide, not a guarantee.
Your next step: calculate your number this week
Take last quarter’s management accounts. Add up fixed costs for a typical month, work out variable costs as a percentage of sales, and apply the formula above. Then write your break-even point on the wall next to your monthly sales target.
If you’d like a clear view of your overall financial health, take the free Business Health Check. If you want help building a break-even model and tracking it against actual results each month, book a 30-minute call, or see how Edvysor for SMEs puts your numbers, targets and actions in one place.
Last updated: 24 September 2026
