Break-Even Analysis: When Does the Investment Pay Off?

"When will we recoup the investment?" – Everyone proposing an IT project hears this question. Break-even analysis provides the answer: It shows at what point revenue exceeds costs.

In this guide, you'll learn how to conduct a break-even analysis and use it to justify projects and investments.

What is the Break-Even Point?

The break-even point is where:

Revenue = Costs

In other words: From this point on, you're no longer making a loss. Everything above is profit.

In IT context often:

• When does the new system save more than it cost?
• After how many customers does the platform pay off?
• After how many months is automation profitable?

The Break-Even Formula

Classic Formula (for Products)

Break-Even Quantity = Fixed Costs ÷ (Selling Price - Variable Cost per Unit)

Example:

• Fixed costs: $10,000
• Selling price: $50
• Variable costs: $20

Break-Even = $10,000 ÷ ($50 - $20) = 333 units

From 334 units sold, you make profit.

Time-Based Formula (for IT Projects)

For IT projects, it's often about time rather than quantity:

Break-Even Time = Investment ÷ Monthly Savings

Example:

• Automation investment: $30,000
• Monthly savings: $5,000

Break-Even = $30,000 ÷ $5,000 = 6 months

After 6 months, the investment has paid for itself.

Break-Even for IT Projects

Example 1: Process Automation

Current state:

• Current manual process: 20 hours/week
• Internal employee hourly rate: $50
• Current costs: 20 × $50 × 52 weeks = $52,000/year

Automation:

• One-time development: $40,000
• Annual maintenance: $5,000
• Remaining effort after automation: 5 hours/week
• New costs: 5 × $50 × 52 + $5,000 = $18,000/year

Savings: $52,000 - $18,000 = $34,000/year

Break-Even:

$40,000 ÷ $34,000 = 1.18 years ≈ 14 months

ROI after 3 years:

Savings: 3 × $34,000 = $102,000
Investment: $40,000
Net gain: $62,000
ROI: 155%

Example 2: Cloud Migration

Current costs (On-Premise):

• Server hardware (depreciation): $15,000/year
• Maintenance & licenses: $20,000/year
• IT personnel (partial): $30,000/year
• Power & cooling: $5,000/year
• Total: $70,000/year

Cloud solution:

• Monthly cloud costs: $3,500
• Annually: $42,000
• One-time migration costs: $25,000
• Year 1: $67,000
• Year 2+: $42,000/year

Break-Even:

• Year 1: $70,000 - $67,000 = $3,000 saved
• Year 2+: $70,000 - $42,000 = $28,000/year saved

The migration pays off from year one!

Example 3: Custom Software vs. SaaS

SaaS solution:

• Monthly: $2,000 for 50 users
• Annually: $24,000
• Over 5 years: $120,000

Custom development:

• Development: $80,000
• Annual maintenance: $10,000
• Hosting: $3,000/year
• Over 5 years: $80,000 + 5 × $13,000 = $145,000

Break-Even: Never! SaaS is cheaper in this scenario.

But: With 100 users (SaaS: $4,000/month = $240,000 over 5 years), it would look different.

Break-Even Diagram

Costs/
Revenue
    │
    │                      ╱ Revenue
    │                    ╱
    │                  ╱
    │                ╱
    │              ╱
    │       ─────╱──────────── Total Costs
    │          ╱│
    │        ╱  │
    │      ╱    │
    │    ╱      │ Break-Even Point
    │──╱────────│
    │╱          │
    └───────────┴──────────────► Quantity/Time
                ↑
           Break-Even

Left of break-even: Loss zone Right of break-even: Profit zone

Break-Even Analysis Template

BREAK-EVEN ANALYSIS

Project: _________________________________
Date: ____________

1. INVESTMENT (One-time Costs)
┌────────────────────────────┬────────────┐
│ Item                       │ Amount     │
├────────────────────────────┼────────────┤
│ Development/Implementation │            │
├────────────────────────────┼────────────┤
│ Hardware/Infrastructure    │            │
├────────────────────────────┼────────────┤
│ Licenses (one-time)        │            │
├────────────────────────────┼────────────┤
│ Training                   │            │
├────────────────────────────┼────────────┤
│ Project management         │            │
├────────────────────────────┼────────────┤
│ Buffer (10-20%)            │            │
├────────────────────────────┼────────────┤
│ TOTAL INVESTMENT           │            │
└────────────────────────────┴────────────┘

2. RECURRING COSTS (per year)
┌────────────────────────────┬────────────┬────────────┐
│ Item                       │ Before     │ After      │
├────────────────────────────┼────────────┼────────────┤
│ Personnel                  │            │            │
├────────────────────────────┼────────────┼────────────┤
│ Maintenance                │            │            │
├────────────────────────────┼────────────┼────────────┤
│ Licenses (recurring)       │            │            │
├────────────────────────────┼────────────┼────────────┤
│ Hosting/Infrastructure     │            │            │
├────────────────────────────┼────────────┼────────────┤
│ Other                      │            │            │
├────────────────────────────┼────────────┼────────────┤
│ TOTAL RECURRING            │            │            │
└────────────────────────────┴────────────┴────────────┘

3. CALCULATION
Annual savings: _________ - _________ = _________
Break-even time: _________ ÷ _________ = _________ months

4. ROI PROJECTION
┌─────────┬────────────┬────────────┬────────────┐
│ Year    │ Savings    │ Cumulative │ Net        │
├─────────┼────────────┼────────────┼────────────┤
│ 1       │            │            │            │
├─────────┼────────────┼────────────┼────────────┤
│ 2       │            │            │            │
├─────────┼────────────┼────────────┼────────────┤
│ 3       │            │            │            │
├─────────┼────────────┼────────────┼────────────┤
│ 5       │            │            │            │
└─────────┴────────────┴────────────┴────────────┘

Using Break-Even in Proposals

As a freelancer or consultant, break-even analysis is a powerful sales argument:

Phrasing in proposals:

"The $40,000 investment in process automation pays for itself in 14 months. From month 15, you save $2,800 per month – that's over $33,000 per year."

Visualization:

Period	Investment	Cumulative Savings	Status
Month 0	-$40,000	$0	-$40,000
Month 6	-$40,000	$17,000	-$23,000
Month 12	-$40,000	$34,000	-$6,000
Month 14	-$40,000	$39,600	Break-Even
Month 24	-$40,000	$68,000	+$28,000
Month 36	-$40,000	$102,000	+$62,000

Compelling Arguments:

1. "It's not if, but when"

"You currently spend $52,000 per year on manual processes. The project costs $40,000. Even in the most conservative scenario, you save money after 18 months."

2. "Opportunity cost"

"Every month without automation costs you $2,800. During a 6-month decision process, you lose $16,800."

3. "Minimize risk"

"We start with a pilot for $8,000. Once expected savings are confirmed, we scale."

Common Break-Even Mistakes

Mistake 1: Forgetting Hidden Costs

• Training effort
• Productivity loss during transition
• Change management
• Integration with existing systems

Mistake 2: Over-Optimistic Savings

Use realistic assumptions. When in doubt, calculate conservatively.

Mistake 3: Ignoring Non-Monetary Benefits

Some benefits are hard to quantify:

• Better data quality
• Higher employee satisfaction
• Lower error risk
• Faster time-to-market

Mention these even if they don't go into the calculation.

Mistake 4: Ignoring Time Value of Money

For longer periods (>2 years), consider time value: $10,000 today is worth more than $10,000 in 3 years. → Use Net Present Value (NPV).

Conclusion

Break-even analysis is one of the most important tools for justifying IT investments. It translates technical projects into business language: When does it pay off?

Remember:

• The shorter the break-even period, the more attractive the project
• Conservative calculations increase credibility
• Communicate non-monetary benefits additionally
• Break-even is the start, ROI is the goal

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Present Investments Convincingly

A break-even analysis is only as good as its presentation. In a proposal, it must be clear, convincing, and professional.

With SimpleProposals, you create proposals that not only look good but also convince with content – clear numbers, traceable logic, and professional design.

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