break-even analysis
Break even analysis is the calculation that tells you how much you must sell before your business stops losing money and starts making it.
In plain English
Aunty Ngozi sells small chops from a table outside her gate in Ogudu, and every Friday evening she counts her pots and mutters the same thing under her breath. Did I even sell enough today to cover the gas and the oil, or did I just stand here for nothing?
That mutter is break even analysis, done in her head without a single sheet of paper. She knows her fixed costs, the table rent she pays her landlord every month, and her variable costs, the flour and groundnut oil that rise and fall with how much she fries.
Break even analysis simply adds up everything you spend to run the business, then works out how many plates, bags, or hours of service you need to sell before that money comes back to you. Anything sold after that point is where the actual profit begins.
A small business owner in Aba making bags might spend ₦150,000 a month on rent, electricity, and a helper's salary. If each bag sells for ₦5,000 and costs ₦2,000 to make, the profit per bag is ₦3,000, so she needs to sell fifty bags a month just to reach zero, and the fifty first bag is where the real money starts.
In London, someone running a small hair braiding service out of a rented chair does the same sum, working out how many clients she needs each week before the chair rent, the products, and the train fare stop eating her earnings alive. The maths does not care what city you live in.
For anyone sending money home to fund a family shop or a small side hustle, this number matters even more, because it tells the family exactly what target to hit before they start celebrating profit instead of just survival.
A shop spends ₦200,000 a month on rent and staff, and sells shoes at ₦8,000 profit per pair after costs. It needs to sell twenty five pairs a month, ₦200,000 divided by ₦8,000, before it breaks even, and every pair after that is pure gain.
Questions people ask
What exactly counts as a fixed cost versus a variable cost?
Fixed costs stay the same whether you sell one item or a hundred, like rent, salaries, and monthly subscriptions. Variable costs change with how much you produce or sell, like raw materials, packaging, and delivery fuel. Break even analysis needs both figures to be accurate before it can give you a true number.
Does break even analysis tell me if my business idea is good?
It tells you how much you need to sell to stop losing money, which is useful information, but it does not judge whether that sales target is realistic for your market. You still need to ask whether enough customers actually exist to buy that quantity from you every single month.
How often should I recalculate my break even point?
Any time your rent increases, you hire someone new, your supplier raises prices, or you change what you charge customers. A break even point calculated a year ago on old costs can calmly mislead you into thinking you are safer than you actually are.
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