Break-even and payback · Finance Platform

Break-even is the first month with a profit; payback is the month the money spent so far has been earned back. Why payback comes later and why investors ask about both.

Break-even

The break-even month is the first month in which the result is zero or positive: that month's revenue covers that month's costs. In the forecast it is the first month from today with an operating result of at least zero and at least one customer:

t_{BE} = \text{the first month with } \text{result}_t \ge 0

Payback

The payback month is later: it is the first month in which the cumulative result, including the up-front investment and every loss before break-even, is back to zero. Until then the company needs money from somewhere to cover the gap; that amount is the money needed:

\begin{gathered} t_{PB} = \text{the first month with } \sum_{s \le t} \text{result}_s - \text{investment} \ge 0 \\[8pt] \text{money needed} = \text{the deepest point of that sum} \end{gathered}

An example

A product costs 40,000 to build. It loses 10,000 in month 1, 5,000 in month 2, breaks even in month 3 and then earns 15,000 a month. Cumulative cash is −50,000 after month 1, −55,000 after month 2 and month 3, then −40,000, −25,000, −10,000 and +5,000 in month 7. Break-even is month 3, payback month 7 and the money needed 55,000.

Using it for pricing

A higher price usually brings break-even and payback forward but may win fewer customers. The pricing simulation compares candidate prices on exactly these milestones and suggests the lowest whole price that pays back within your target; see Price a consumer subscription.

The exact formulas

Pricing simulation: results and forecast break-even