There is one figure every consultant, agency owner and studio lead should know by heart: the point at which the work starts paying for itself. Not the revenue that feels comfortable. The revenue that covers the rent, the software, the insurance and the wages, and leaves nothing behind.
Break-even is that figure. It is not glamorous, and it will not appear on a pitch deck, but it turns vague anxiety about money into something you can plan around. It also makes pricing conversations far easier, because you stop guessing what a project needs to be worth. Here is how to work it out, with a worked example you can adapt to your own numbers.
Before the formula: sort your costs into two piles
Every cost in your business is either fixed or variable. Get this split right and the rest is arithmetic.
Fixed costs are the ones that turn up whether you sell anything or not: studio or office rent, professional indemnity insurance, accountancy fees, software subscriptions, phone and broadband, marketing retainers, bank charges, and the salaries of permanent staff. Variable costs only exist because a piece of work exists: associate or freelancer fees, commission, card processing charges, client-specific travel, per-project licences, print and courier costs.
Plenty of costs sit awkwardly in between. A part-time designer you keep on retainer is fixed, even though their hours track the work. A sensible test: if you would keep paying it for three months with no new sales, treat it as fixed.
The break-even formulas
Service businesses can measure break-even in days, projects or pounds. The formulas are the same either way.
- Contribution per unit = price per unit − variable cost per unit
- Break-even in units = total fixed costs ÷ contribution per unit
- Contribution margin ratio = contribution per unit ÷ price per unit
- Break-even revenue = total fixed costs ÷ contribution margin ratio
In a consultancy, the "unit" is usually a billable day. In an agency, it might be a standard project or a month of a retainer. Pick the unit that matches how you quote work, and stay consistent.
Two housekeeping rules. Work in net figures, excluding VAT, because VAT is not your money. And use one time frame throughout — monthly fixed costs with a monthly unit, or annual with annual.
A worked example
Ridgeway & Co is a two-person strategy consultancy. Its monthly fixed costs total £12,600: salaries for a part-time operations manager, studio rent, insurance, software, accountancy and a modest marketing budget.
It charges a blended £650 a day, net of VAT. When client work exceeds what the two founders can deliver, they bring in associates at £230 a day. Blending that across all billable days, the variable cost is £230 per day.
Contribution per day: £650 − £230 = £420.
Break-even: £12,600 ÷ £420 = 30 billable days a month.
In revenue terms: 30 × £650 = £19,500. Check it with the ratio: £420 ÷ £650 = 0.646, and £12,600 ÷ 0.646 = £19,500.
The two founders have capacity for roughly 40 billable days between them, assuming they spend the rest of their time on business development, admin and thinking. So the margin of safety is ten days, or 25%. Days one to 30 pay for the business. Day 31 onwards is profit.
Now test a decision. A prospect asks for 10% off, taking the day rate to £585. Contribution drops to £355, and break-even rises to £12,600 ÷ £355 = 35.5 days. A 10% discount swallows most of the margin of safety and demands around 18% more billable work to stand still. That is the calculation worth having in your head before you agree a discount.
What to do with the number
Break-even is a floor, not a target. Once you know it, you can build upwards.
Want £4,000 a month of profit? Add it to fixed costs: £16,600 ÷ £420 = 39.5 billable days. That is almost exactly the founders' capacity, which tells them something useful about pricing or hiring before they commit to anything.
Hiring is the classic use. A new salary adds to fixed costs, along with employer's National Insurance and pension contributions. Divide the true annual cost by your contribution per unit to see how many extra billable days the hire must generate. If that number is beyond what the market will give you, the hire is a gamble rather than a plan.
The same logic prices a retainer. If a client wants a monthly retainer of £4,000, and your contribution margin ratio is 64.6%, that retainer contributes about £2,584 towards fixed costs. Three of them and you have covered roughly £7,750 of your £12,600.
Five traps that distort the answer
- Mixing VAT in. Use net figures, or your break-even will look artificially low.
- Leaving out your own pay. If you draw a salary, it belongs in fixed costs. If you take dividends, decide deliberately whether they are a cost or profit, then stay consistent.
- Counting non-billable time as capacity. Nobody bills five days a week, every week.
- Ignoring seasonal swings. A quiet August needs to be covered by a strong September; average months do not exist.
- Using stale numbers. Software prices change, rents change, and so do your rates.
Keep it current
A break-even calculation is not a one-off exercise. Put it in a simple spreadsheet: your fixed cost list down one side, your rates and variable costs down the other, with the formulas above doing the work. Update the fixed cost line whenever a subscription, a hire or a rent review changes it.
Then check it monthly against reality. If you billed 26 days last month and break-even is 30, you know exactly where you stand, and you know roughly what the next fortnight needs to look like. That is far more useful than a vague sense that things are quiet.
Keep it simple, keep it honest, and treat the answer as the price of admission rather than the goal. For anything involving tax, VAT registration or how you take money out of the business, your accountant will give you a better answer than any formula.
Photo: Kindel Media / Pexels
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