Use break-even analysis before committing to a new product, branch, machine or staffing level.
Step 1: Define the decision and period. A monthly calculation for one product answers a different question from an annual calculation for the entire company.
Step 2: Identify the selling price. Use the expected net price after normal discounts, not the highest advertised price.
Step 3: Calculate variable cost per unit. Include costs that rise with each unit, such as direct materials, packaging, sales commission and transaction fees. For a service, choose a consistent unit such as an hour, visit or contract.
Step 4: Calculate contribution per unit. Subtract variable cost from selling price.
Step 5: Estimate fixed costs for the period. Include rent, core salaries, software, insurance and other costs that do not normally change with each unit within the relevant range.
Step 6: Divide fixed costs by contribution per unit. The result is the simplified break-even sales volume. Multiply that volume by price to express the result as revenue.
Step 7: Test scenarios. Recalculate for a lower price, higher material cost, slower ramp-up and additional staffing. If the model assumes full capacity immediately, it is likely too optimistic.
Step 8: Compare with credible demand. A mathematical break-even point is not evidence that the market will buy that quantity.
Step 9: Add cash timing. Deposits, stock purchases, credit terms, VAT and loan payments may create a cash gap even after the operation reaches accounting break-even.
Keep a one-page assumptions sheet beside the calculation. World Bank SME financial-management guidance emphasises financial analysis and investment assessment as practical management capabilities. If management cannot explain the price, unit cost, fixed cost and expected volume, the result is not decision-ready.
