Break even and runway: two numbers every owner should be able to say aloud

How many sales before the business stops losing money, and how many months of cash are left if nothing changes. Both are simple. Both are routinely unknown.

I have sat across from owners who could tell me their sales to the dollar and could not tell me what it would take to stop losing money. It is not carelessness. Nobody ever showed them the two numbers, and the two numbers are short.

Break even

Fixed costs are what you pay whether you sell anything or not: rent, salaries, insurance, software. Variable costs are what each sale costs you: materials, card fees, shipping, commissions. Contribution margin is the price minus the variable cost of one sale. Break even is the point where all your contribution margins added up equal your fixed costs.

Break even units = Fixed costs ÷ (Price − Variable cost per unit)

A coffee cart pays $2,400 a month in fixed costs. Each drink sells for $5 and costs $1.50 in beans, milk, and cups. Contribution margin is $3.50. Break even is $2,400 divided by $3.50, about 686 drinks a month, or 23 a day over thirty days. Above that, each drink adds $3.50 to profit. Below it, each drink not sold is $3.50 further from paying the rent.

For a business with many products, break even is more useful as a revenue number. Contribution margin ratio is contribution margin divided by price, and break even revenue is fixed costs divided by that ratio. If the blended ratio is 40 percent and fixed costs are $20,000 a month, break even revenue is $50,000 a month. The ratio hides a lot: a shift in what sells toward lower margin items raises the break even without a single price changing.

Owner pay is the most common thing left out. An owner who takes nothing has a lower fixed cost figure and a flattering break even. Put a fair salary for yourself into fixed costs and the number often doubles. That is the honest number, because a business that only survives by not paying its owner is not yet a business.

Runway

Runway in months = Cash on hand ÷ Monthly net burn

Net burn is cash going out minus cash coming in each month. A business with $60,000 in the bank losing $8,000 a month has seven and a half months. That is the date by which something has to change: sales rise, costs fall, or money comes in from somewhere else. Knowing the date is what turns worry into a plan.

Where the tidy version goes wrong

Break even uses accounting numbers and runway uses cash, and they can split apart badly. A business can be past break even on paper and run out of cash because customers pay in ninety days while suppliers want money in thirty. The reverse happens too: a business below break even with years of runway because someone funded it. Both numbers matter, and mixing them up is how profitable businesses go broke.

Questions worth asking yourself

What are your true fixed costs, with a salary for yourself in them? What is your contribution margin per sale, or as a ratio? How many sales, or how much revenue, is break even, and how far are you from it? What is your net monthly burn, and what date does it run out? And how long is the gap between when you deliver and when you get paid?

Sources

Written by one person and checked against the sources above; no outside expert has reviewed it yet. Rules and dollar limits change every year, so this guide explains how things work and sends you to the official source for this year's numbers.