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Lesson 4 of 5Entrepreneurship: From Mindset to Venture
Unit 2 · Lesson 4 of 5

Start-Up Budget and Break-Even

A start-up budget adds up the one-time costs and the first period's operating costs so you know how much money you need before opening; break-even analysis then tells you how many units you must sell to cover your fixed costs.

5 min read1 quick check9 practice questionsInteractiveAsk AI about this →

Key things to remember

  1. 1Start-up budget = one-time costs + first-period operating costs (+ a cushion for surprises).
  2. 2Fixed costs stay the same whatever you sell; variable costs rise with every unit.
  3. 3Contribution per unit = price − variable cost per unit.
  4. 4Break-even units = fixed costs ÷ contribution per unit, always rounded up to a whole unit.
  5. 5Profit = units × contribution − fixed costs. Below break-even it is a loss; above it, a profit.

The two most important money questions for any new venture are: how much do I need before I sell anything, and how many do I have to sell before I stop losing money? The first is answered by a start-up budget. The second is answered by break-even analysis. Both are simple arithmetic, and together they tell you whether your price makes sense and how much risk you are taking. All prices in this lesson leave out sales tax to keep the math simple.

Building the Start-Up Budget

A start-up budget is a list of all the money a venture needs before it can open and run through its first period. It has two parts. One-time costs are paid once at the start, such as equipment and a banner. First-period operating costs are the regular costs of running the venture until sales start coming in, such as the first market table fee and the first batch of inventory (the products you have ready to sell). Many owners add a cushion, extra money set aside for surprises.

ItemPart of budgetCost
Heat pressOne-time$300
Display table and hoodie rackOne-time$60
Banner and logo printingOne-time$40
Card readerOne-time$60
Sample hoodies for prototypes (2 × $25)One-time$50
Subtotal: one-time costs$510
First market table feeFirst period$85
First month of social media adsFirst period$40
First month of order-form planFirst period$10
First batch of inventory (20 × $25)First period$500
Subtotal: first-period operating costs$635
Cushion for surprisesExtra$105
Total start-up budget$1,250
Grad Gear's start-up budget: $510 + $635 + $105 = $1,250 needed before the first market.
Example: start-up capital for a custom T-shirt business$1,800Equipmentheat press$200Licencesand fees$900Initialinventory$500Depositsrent$350Websiteand logo$3,750Start-upcosts$2,100Operatingreserve3 × $700$5,850Totalcapitalone-time start-up costs$3,750 one-time costs + $2,100 operating reserve = $5,850 start-up capitalThe reserve covers 3 months of operating expenses at $700 a month while sales build up.
Fig 1One-time costs plus a reserve for running costs stack up to the total start-up money you need.

Fixed Costs and Variable Costs

To find the break-even point you sort every cost into one of two groups. A fixed cost stays the same no matter how many units you sell: the heat press costs $300 whether you print 5 hoodies or 500. A variable cost changes with every unit you make: each extra hoodie needs another blank, another transfer and another bag. Leila wants the spring season to pay back everything she spends, so she counts the full cost of her equipment as a fixed cost for the season.

AFixed costs for the season (total $1,000)
  • Heat press $300
  • Display table and rack $60
  • Banner and logo $40
  • Card reader $60
  • Sample hoodies $50
  • Market table fees: 4 × $85 = $340
  • Social media ads: 3 months × $40 = $120
  • Order-form plan: 3 months × $10 = $30
BVariable cost per hoodie (total $25)
  • Blank hoodie $18
  • Print transfer and ink $6
  • Bag and tag $1
  • Doubles if you sell twice as many
  • Zero if you sell none

Contribution and the Break-Even Point

Each hoodie sells for $45 but $25 of that goes straight to the hoodie's own materials. The $20 left over is the contribution per unit: the amount each sale contributes toward paying the fixed costs (and, once those are paid, toward profit). The break-even point is the number of units at which total revenue exactly equals total costs, so profit is zero. Divide the fixed costs by the contribution per unit.

Always round break-even up
You cannot sell part of a hoodie. If the division gives 58.8, selling 58 still leaves you short, so the break-even point is 59. Round up to the next whole unit every time, even if the decimal is small.
Loading interactive…
Set the price to 45, the variable cost to 25 and fixed costs to 1,000, and find where the lines cross. Then lower the price and watch the break-even point move.
VideoSee the break-even point in words, on a graph and as a formula using contribution margin, the same idea this lesson uses.Watch on YouTube

Profit at Any Volume

Once you know the contribution, you can find the profit (or loss) for any number of units: multiply the units by the contribution and subtract the fixed costs. The table below checks this the long way, with revenue and total costs, so you can see both methods agree.

Hoodies soldRevenue (× $45)Variable costs (× $25)Fixed costsTotal costsProfit or loss
30$1,350$750$1,000$1,750−$400 (loss)
50$2,250$1,250$1,000$2,250$0 (break-even)
80$3,600$2,000$1,000$3,000$600
Below 50 hoodies Grad Gear loses money; at exactly 50 it breaks even; at 80 it reaches its $600 profit target.
Quick checkTry it before you read on
1
Grad Gear sells 63 hoodies. Using a contribution of $20 and fixed costs of $1,000, what is the profit? Give a whole number of dollars.
$

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
Add up Grad Gear's start-up budget from its two parts and the cushion.
Example 2
Find Grad Gear's break-even point: price $45, variable cost $25 per hoodie, fixed costs $1,000.
Example 3
Leila considers lowering the price to $42. Find the new break-even point.
Example 4
How many hoodies must Grad Gear sell to hit its $600 profit target?

Where marks get lost

  • Dividing fixed costs by the price ($1,000 ÷ $45) instead of by the contribution ($1,000 ÷ $20).
  • Rounding a break-even answer such as 58.8 down to 58, which leaves the venture short.
  • Putting the cost of each blank hoodie in fixed costs, or the heat press in variable costs.
  • Leaving the first batch of inventory out of the start-up budget, so the owner runs out of money before the first sale.
  • Thinking break-even means making money. At break-even, profit is exactly zero.

Flashcards 8

Start-up budget
One-time cost
Fixed cost
Variable cost
+ 4 more

Practice

1
A cookie stand sells boxes for $8. Each box costs $3 in ingredients and packaging. What is the contribution per box? Give a whole number of dollars.
$
2
The cookie stand has fixed costs of $240. How many boxes must it sell to break even?
boxes
3
A sticker venture has fixed costs of $150, a price of $4 and a variable cost of $1.50 per sticker. How many stickers must it sell to break even? Round up to a whole sticker.
stickers
4
A phone-charm venture has fixed costs of $200, a price of $10 and a variable cost of $3. How many charms must it sell to break even? Round up to a whole charm.
charms
5
Grad Gear sells only 30 hoodies (contribution $20, fixed costs $1,000). What is the profit? Enter a loss as a negative number.
$
6
A start-up has one-time costs of $420, first-period operating costs of $380 and a cushion of $100. What is the total start-up budget? Give a whole number of dollars.
$
7
Which of these is a variable cost for Grad Gear?
8
At the break-even point, a venture's profit is...
9
If the variable cost per unit goes up and the price stays the same, the break-even point...

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