How does a trade business calculate its break-even point?

The formulas

Business Queensland defines break-even as the point where total revenue equals total costs, so there is no profit or loss. It gives the simple calculation as fixed costs divided by gross profit margin, and says gross profit per unit can also be called contribution margin.

Our version for trade work uses contribution, which is the job price minus the variable cost of that job. All figures exclude GST.

Contribution per job = job price - variable cost of the job
Contribution margin ratio = contribution per job / job price
Break-even sales = fixed costs / contribution margin ratio
Break-even jobs = fixed costs / contribution per job

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Sort fixed and variable costs once

Business Queensland lists rent, insurance, accounting, licence fees and depreciation as fixed expenses, and labour, raw materials and delivery as variable. It says your operating expenses should include the wages or drawings you pay yourself. Put each dollar in one bucket only so nothing is counted twice: wages paid regardless of work are fixed, while materials and labour that you pay only because a job exists are variable.

Business Queensland also notes the gross margin is not commonly used for service businesses because cost of goods is not a major factor, which is why this guide uses job contribution.

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Worked example

This is our fictional example. Monthly fixed costs are $6,000: owner wage $3,000, ute and insurance $1,200, software and phone $400, accounting $400 and depreciation $1,000. An average job sells for $1,000 excluding GST, with variable cost of $700 ($350 materials and $350 direct labour). Contribution is $300 a job, a 30% ratio. Break-even is $6,000 / 30% = $20,000 in sales, or $6,000 / $300 = 20 jobs.

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Operating profit is not cash

Business Queensland says profit is not the same as the cash in your bank or your total sales. A month at break-even can still leave you short of cash if customers pay late or you buy materials before you are paid. Treat break-even as a pricing and capacity check and keep a separate cash view.

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Using the result

Use the result to compare the jobs needed each month with the work your crew can realistically complete. If the number is too high, examine your price, variable costs and fixed overheads. Rework the calculation when those assumptions change.

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Common questions

How do I calculate the break-even point?

Divide your fixed costs by your contribution margin ratio to get break-even sales, or by the contribution per job to get break-even jobs. Business Queensland gives a simpler fixed costs divided by gross profit margin version and says to talk to your accountant, bookkeeper or tax agent.[1]

What is considered a good break-even point?

A useful break-even point is one your available jobs and crew capacity can support with room for quieter periods. Compare the calculated job count with realistic completed jobs, and check how a price or cost change affects the result.[1]