How many units must your business sell before it stops making a loss? It's the first number a bank, a Start Up Loans assessor or an investor will look for in your business plan — and the fastest way to sense-check your pricing. Here's how to work it out properly for a UK business.
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What break-even means
Break-even is the level of sales at which turnover exactly covers all your fixed and variable costs. Profit is nil. Below it you're eating into savings or an overdraft; above it, each sale adds profit equal to its contribution margin. You can express it in units, in turnover, or as the point in the trading year when you move into the black.
The formula
- Fixed costs — rent, business rates, public liability insurance, accountancy fees, software, salaried staff plus employer National Insurance.
- Selling price per unit, excluding VAT.
- Variable cost per unit — materials, packaging, Royal Mail or courier postage, card processing, marketplace commission.
Price minus variable cost is your contribution margin. Then:
Break-even units = Fixed costs ÷ Contribution margin per unit
Multiply by price for the turnover you need.
Worked example: a candle maker in Manchester
Sarah's annual fixed costs come to £12,000: £550/month for a shared studio, £90/month for insurance and her website, and £3,320 on marketing. Each candle sells for £50 excluding VAT and costs £20 in wax, glassware and postage.
- Contribution margin: £50 − £20 = £30, a 60% margin.
- Break-even: £12,000 ÷ £30 = 400 candles a year.
- Break-even turnover: £20,000, roughly 34 candles a month.
The VAT threshold changes everything
This is the UK-specific trap. Below the VAT registration threshold you keep the full £50. Once your taxable turnover crosses it, you must register with HMRC and 20% of each sale goes to the taxman unless you raise your prices. Keep the price at £50 including VAT and your net becomes £41.67 — your margin falls from £30 to £21.67 and your break-even jumps from 400 to 554 candles. Plan for that cliff edge before you hit it, and remember you can reclaim input VAT on materials, which softens the blow.