Once you find your break-even point (BEP), you’ll never look back.

“How to Calculate The Break-Even Point for Service Businesses”. 

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If you saw this title in a bookstore, you probably wouldn’t buy it, but investing a small period of time in finding out the answer could be worth a fortune to your new business.

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A break-even analysis, including your fixed and variable costs, is one of the smartest things you can do when launching a business. It’s one of the first factors the most successful entrepreneurs look for when working out if a venture is to be profitable.

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Your break-even point (BEP), will tell you what you need to do to make back your business outlay and start making gross profit. 

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Some financial experts even say it’s critical to your business’s success. “Mastering break-even analysis is an invaluable skill for small business owners,” says accounting specialist Glenn Perlinger. “By understanding this concept, you can set realistic sales goals, determine appropriate pricing, and make informed decisions about your business's future. 

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“Mastering break-even analysis is an invaluable skill for small business owners” — Glenn Perlinger, financial expert

So, if you’d like to know how to calculate the break-even point for service businesses, then read on as we cover everything you need to know to get an accurate BEP.

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What is the break-even point? 

A business’s break-even point is the level at which your revenue is the same as your costs.

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In other words, it’s the point where you cover all your expenses and start to make a profit for each further sale you make. 

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The BEP is the base from where you can start to reduce your costs (including labor and materials) and/or adjust your pricing. 

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Many businesses neglect their BEP, which puts them at a disadvantage. If you don’t know your bottom line, then it’s difficult to know what to do to achieve a net profit.

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The good news is that finding your BEP takes just minutes if you know what you’re doing.

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How to calculate the break-even point for a service business

The following formula will help you find your BEP in seconds. All figures are for monthly amounts, but you can do it on a yearly or even weekly basis.

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Break-Even Point = Total Fixed Costs ÷  (Sales Volume Per Unit - Variable Cost Per Unit)

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Note (i) A service business may not sell products (or units), so for “units” we can use number of customers instead.

Note (ii) The second part of the equation (sales volume per unit - variable cost per unit) is known as the Contribution Margin, a term you’ll see later on in this article.

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How to calculate the break-even point for a service business

                             Source: Shopify

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To make this break-even point formula work we need to know exactly what to put into each section of the break-even point equation, so let’s run through these terms.

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Fixed costs

These are costs that are not affected by your sales. The most common (and important) one is your mortgage or rent payment, but it might also include

• Equipment
• Property taxes
• Insurance
• Fixed labor costs (i.e. contracted work)
• Software subscription
• Advertising

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Add all of these together to get your total fixed cost amount. Using an Excel spreadsheet is a good idea for this as it will automatically add the amount up for you. 

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Example: Let’s say you run a small restaurant in Kuwait. Your fixed costs for the month (including equipment leases, waiter/chef salaries, utilities, and building insurance) come to KWD 6,500. 

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How your fixed costs spreadsheet might look 

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Variable costs 

Variable expenses do fluctuate according to your total sales volume. Make a list of these.

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Here are some of the most common examples.

• Product raw materials
• Production costs
• Commission
• Energy bills

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Note: It’s possible that some costs will fall into either the fixed or variable categories. Wages for example might be salaries (fixed) or commission-based/cover staff (variable).

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Example: The total variable costs of your restaurant (including food and beverage costs, hourly staff wages, kitchen supplies, and marketing and advertising) come to KWD 6,800 per month. 

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Let’s say you had 250 customers: your variable cost or price per unit is 6,800 ÷ 250 = KW 27.2.

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How your variable cost spreadsheet might look

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Sales volume per unit

This is simply the total revenue you generate divided by the number of units, or customers, you have.

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Let’s say your restaurant brings in KWD 15,000 for the month. 

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You can work out your sales revenue per unit by dividing that figure by the number of customers you had, which in our example was 250 for the month. 

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Your sales volume per unit for the month was (15,000 ÷ 250) = KWD 60

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Now, let’s put all of the above information into the equation to work out your BEP.

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Contribution Margin per Customer

We can start by working out our contribution margin per customer, which we then use to divide our fixed costs

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As a reminder: Contribution margin per customer = average sales per customer - variable costs per customer.

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In the restaurant’s case, the contribution margin per customer is the average sales per customer (KWD 60) minus variable cost per customer (27.2). 

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Contribution margin per customer = KWD 60 - KWD 27.2 = KWD 34.80

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Break-Even Point (in Customers)

Break-Even Point (in customers) = total fixed costs contribution margin per customer

Break-Even Point (in customers) = KWD 6,500 ÷  KWD 34.80 ≈ KWD 186.78

This means we need to get 187 customers through the door each month to break even. 

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Break-Even Point (in KWD):

Break-Even Point (in KWD) ≈ 186.78 customers x  KWD 60 ≈ KWD 11,206.80

We need to hit a monthly revenue of KWD 11,206.80 to break even (i.e. cover all monthly fixed and variable costs)

Following this guide step-by-step but applying your own figures should lead you to your business’s BEP. Good luck!

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The benefits of finding your break-even point

Once you know how to calculate the break-even point for a service business, you’ll be in a much better position to run your business and look ahead to the future. 

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We might even say that your BEP isn’t just a number, but a compass for navigating the business world more confidently.

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Here’s a run-down of the benefits of doing a break-even calculation.

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It helps cash flow

Small business owners know that cash is king. 

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Your break-even point will help you stay on top of your finances as you’ll know how much cash you’ll need to cover your costs. 

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By using the above BEP template, you’ll have a better idea of unit selling prices, contribution margins, and sales targets, and you’ll be able to adjust each one to keep your cash flow in check and avoid any nasty surprises later on.

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It helps with strategic business planning

A solid business plan is essential, whether you’re launching a new startup or launching a new product.

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A break-even analysis will help you crunch the numbers that will go into the plan, including realistic sales projections and making informed decisions about a pricing strategy. 

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This will make it much more likely to secure lending (should you need it), and you’ll even be able to impress your bank manager by talking about contribution margin ratios and analysis formulas!

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It guides you toward smarter business decisions

Running a small business involves numerous decisions, each critical to its success, and the success of these decisions improves in line with the depth of our knowledge.

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Let’s go back to the example of the restaurant above. Its owner, now with a clear understanding of their BEP, can confidently decide pricing and sales forecasts. 

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Without it, they would be simply guessing, something that is dangerous for any business decision-maker.

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Knowing your BEP gives you the tools to maximize profitability

Entrepreneurs know that it’s all about the bottom line.

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Break-even point analysis gives you tools to optimize your returns because you understand the relationship between sales volume, unit selling prices,  and profit margins better than before.

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This lets you fine-tune your pricing structure so that you strike that perfect balance between attracting customers and making a profit. 

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How to lower your break-even point

Now that you know how to find your break-even point, you might be wondering how to lower it and make your business more profitable. 

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Here are some strategies to consider.

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1. Reduce fixed costs 

Your fixed costs are the main component of your BEP. While tricky, you could lower them by switching utility providers, cutting down on energy usage, or even renegotiating your rent or mortgage payments. 

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Getting this figure as low as possible will bring down your BEP and help you reach profitability quickly.

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2.  Increase sales volume 

You can boost your sales by launching new marketing campaigns, expanding your service offerings, or targeting new customer segments.

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While this will push up your costs temporarily, it may have the long-term effect of bringing down your BEP by spreading it over a larger revenue figure. 

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3.  Improve efficiency

Small business owners often overlook efficiency in a bid to reach a certain sales figure, but streamlined work processes and reduced waste can help boost revenue. 

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Take a look across your business and identify areas that you can tighten up. 

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In the case of a restaurant, this might include installing a restaurant point-of-service system to minimize wait times and boost order accuracy, or cross-training staff to handle multiple roles effectively. 

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4. Raise prices

If your BEP is too high, then you may not be charging your customers enough. Often, you can do this without sacrificing sales volume.

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Conduct market research to determine if there's room to raise prices without pricing yourself out of the market. If justified, modest sale price increases will boost your revenue and bring that BEP down.

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5.  Diversify revenue streams

Offering new products or services helps spread risk and potentially boosts your gross margin.

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Doing it well can reduce dependence on any single source of income and lower your break-even point over time.

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You don’t have to put all these strategies fully into action right away, but aiming for gradual improvements in each area is your best chance of lowering that BEP and putting your business on track to long-term success.

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