How to Calculate Your Break-Even Point
What is a break-even point?
The break-even point for a service business is when your costs and your revenue become equal. In other words, it’s when you start to make as much as you spend.
Reaching break-even is the moment your business goes from covering costs to actually being profitable.
For example, if the total monthly costs to run your home service business are $10,000, your break-even point is when you make $10,000 from jobs in one month. Revenue from jobs you perform after that will contribute to your profits.
Costs include rent, bills, wages, equipment, and materials. Revenue is the total amount a customer pays you for a job.
How to calculate your break-even point
To calculate your break-even point, you’ll need to know three separate numbers:
1. Fixed costs: Fixed costs include rent, insurance, bills, and equipment. Fixed costs don’t change over time and are relatively consistent each month.
2. Variable costs: Variable costs are costs that change over time or that are dependent on a job, like supplies, gas, and billable hours.
Variable costs depend on a variety of different factors. Determine your average variable costs per month by adding them up and then dividing them by the number of jobs you completed.
For example, if you finished 50 jobs and spent $5000 on variable costs in a month, your average variable cost per job would be $5000/50=$100.
3. Price per job: Although your price per job can vary by the size of the job, the materials you need, and even the condition of the property or job site, you need to have an average price per job to calculate your break-even point.
To determine an average price per job, take your total revenue for jobs over three months to a year, add them up, and divide by the number of jobs.
For example, if you completed 50 jobs over three months and made $25,000, your average price per job would be $25,000/50=$500.
Break-even point formula
Use the following break-even point formula to find your own break-even point. Just swap your own numbers into this equation:
(PRICE PER JOB) – (VARIABLE COSTS) = BREAK-EVEN POINT
Using this formula, let’s say that our fixed costs are $5000 per month, our variable costs are $50, and our price per job is $250. In that case, we would calculate our break-even point like so:
That means that we would need to complete 25 service jobs in one month (with variable costs of $50 per job, and jobs at a minimum of $250 each) to reach our break-even point.
Sometimes, your break-even point will improve as your job volume increases, material costs decrease, or your average price per job goes up.
Keep an eye on it over time to monitor any changes or areas of opportunity before they become a problem.
Why is my break-even point important?
Responsible business owners know their break-even point (BEP) per year, per month, and per week, in some cases.
Knowing your break-even can help you:
- Find out when you’ll be profitable
- Lower your business costs
- Raise your service prices
1. Using your break-even point to predict profitability
After you reach your break-even point, any revenue you make counts toward your profit. So, you can use your BEP to tell you how many jobs you need to complete per month to become profitable.
Let’s say your break-even point calculation tells you you need to complete 25 jobs per month at an average of $250 per job to cover costs. If you complete 28 jobs, those three extras will be completed at profit.
In other terms: If your revenue is below your break-even point, you’re not profitable. If it’s above, you are.
2. Using your break-even point to adjust costs
If your break-even point seems unattainable, it might be that your business costs are too high to cover with your current workload.
This means you need to lower business costs. For example, finding a smaller office space or negotiating deals with vendors.
By lowering your costs, you can reach your break-even point (and profitability) faster.
3. Using your break-even point to set pricing
If your break-even point is unattainable and you can’t cut costs, you need to change your pricing instead.
That can mean raising prices for supplies, labor, or an overall job.
Play around with different prices in your break-even point calculation to see what a realistic price increase could be. Then, try out different pricing strategies to achieve your new goals.
It may be as easy as raising your prices across the board. Or, you may need to change your focus to bigger clients, bigger jobs, or a new service area.
Breaking even in your service business
Most service businesses aren’t profitable right away. But knowing your break-even point can give you an idea of what you need to work towards and whether your costs and pricing structures are realistic and attainable. It’s a great way to take your business’s temperature to determine whether you need to pivot or make small adjustments on your way to profitability.
Fine-tune costs and pricing as needed to keep your service business on a clear path to success.