By Claudia Perez

The break-even point is nothing more than the balance between total revenue and total expenses-both fixed and variable. It is the point where a business experiences no losses and begins to be profitable.

Since I know many of you may be asking yourselves: How do we calculate this point? And what practical application does it have for a business? I propose we dive into the following example.

Break-Even Simplified: Learning from a Real case in Havana

In 2017, my husband and a friend started an Airbnb business in Havana. Although the apartment “Loft Industria”-the business’s official name on Airbnb Platform- generated profits, they never calculated the break-even point. To conduct this study, the owners provided me with some data that we’ll use in today’s exercise.

Premises: 

1. The data provided is from 2017, so it does not account for the inflationary process that occurred post-pandemic.
2. All expenses were standardized to U.S. dollars. Some business services were paid in the local currency, and the apartment was marketed in dollars. For the purpose of this study and to ensure consistency in the data and calculations, all amounts were converted to dollars based on the 2017 exchange rate (25 Cuban pesos= 1 dollar).
3. The tourism sector in the country is seasonal, so the calculation was made considering the winter high season.

According to the information provided, the Airbnb had the following expenses:

Fixed Costs:

• Utilities: Electricity ($16), Water ($3), Telephone ($2)
• HOA ($3)
• Wi-Fi ($10)
• Promotion ($10 for Google Ads)
• Total Fixed Costs: $44

Variable Costs

• Laundry ($5 per night/bed linen and towel changes)
• Cleaning ($5 per night)

Selling Price: $ 30 per night

Break-Even Calculation

Using the above data, the break-even formula (Fixed Costs divided by Contribution Margin) is as follow:

Break-Even= Fixed Costs/ (Selling Price-Variable Cost)

Break-Even=44/ (30-10)

Break-Even= 2.2 or 3 nights

Conclusion: The business needed to rent the apartment for at least 3 nights per month to cover fixed costs and start being profitable.

As you can see, my dear readers, this is a simple formula that is easy to apply, especially if we maintain proper accounting in our businesses. It is a calculation that provides valuable insights, for example in the case of my business owners, it allows them to:

1. Identify the minimum occupancy level required to cover costs and avoid losses.
2. Set clear occupancy goals and evaluate how increases in fixed costs or decreases in selling prices might affect the profit margin. For example, if the apartment’s selling price decreases while fixed costs increase, the break-even point would act as an alert for owners to implement and adjust strategies.
3. In the specific case of this business-and considering the premises about the seasonality of the tourism and hospitality sector in the country-the break-even calculation would be critical decision-making, especially during low seasons when the price per night tends to be lower. This would allow the owners to consider necessary adjustments such as increased advertising or cost optimization to ensure the business’s sustainability.

That’s it for today’s post, my dear readers. I hope this example has helped illustrate the importance and impact of data analysis in decision-making for your businesses, particularly with the break-even point. As always, I say goodbye not with a farewell but with a “See you next Week”.