1. The margin that reaches your cash
Bad debt eats the contribution margin (not revenue): you already paid the variable cost of that sale.
Materials, commissions, and card fees per sale.
Share of what you invoice and never collect.
Optional — used to calculate the safety margin.
2. Fixed cash outflows (not fixed costs)
Remove what is not cash (depreciation) and add what leaves the bank but the P&L does not show (debt principal, owner draws, capex).
Rent, salaries, owner's pay, depreciation — as in the P&L.
It does not leave your cash. Remove it from the numerator, never from the margin.
Monthly amortization — leaves your cash, does not appear in the P&L.
Optional — for the survival break-even.
Minimum replacement of machines and equipment.
3. The result
The two adjustments pull in opposite directions: bad debt pushes the break-even up, depreciation pushes it down. The cushion that holds the company through a bad season is the cash one, not the paper one.
How to read your cash break-even point
Three fictional scenarios so you can practice reading the results before looking at your own numbers.
- What to look at
- Current revenue above the cash break-even, with a safety margin above 20%.
- What it means
- The operation covers costs, debt, and owner draws with real slack — cash is left for reserves and growth.
- Next steps
- Formalize owner draws, build a 3-month fixed-cost reserve, and consider paying down expensive debt.
- What to look at
- Revenue above the accounting break-even, but a cash safety margin between 0% and 20%.
- What it means
- On paper it is profitable; at the bank, any weak month turns into a squeeze. Owner draws or loan installments are probably heavy.
- Next steps
- Stretch principal installments, temporarily reduce draws, and attack bad debt to regain slack.
- What to look at
- Revenue below the cash break-even (negative margin) or bad debt ≥ contribution margin.
- What it means
- The company burns cash every month even while showing accounting profit. The cycle ends in working-capital debt or new equity.
- Next steps
- Cut fixed costs, review credit policy, renegotiate debt — and only then think about raising price or volume.
Did I really understand the traffic light?
3 quick questions based on the guide above. Answer and see the correct answers right away.
- 1Your company is above the accounting break-even but below the cash break-even. What does that mean?
- 2If the bad-debt rate is equal to or higher than the contribution margin, what happens to the cash break-even?
- 3A cash safety margin of 8%: how does the guide say you should act?
Section 10.6 — Cash break-even point
The book explains why the income statement lies about your revenue floor and how cash gets the math right.
Buy the book →