Fixed cost coverage ratio: the one number that tells you if your shop is paying for itself.

Fixed cost coverage ratio is total contribution margin divided by total fixed costs over the same period. 1.0 means break-even — every euro of fixed cost is covered exactly by the contribution margin from sales. Above 1.0 means profit; below 1.0 means loss.

What it means

A small shop has two cost layers. Variable costs scale with each sale (COGS, packaging, card fees). Fixed costs do not move when sales move (rent, salaries, insurance, software). The contribution margin from each sale is what is left after variable costs — and that contribution margin pile needs to grow large enough each month to cover the entire fixed-cost stack.

Fixed cost coverage ratio measures exactly that. A ratio of 0.8 means your shop's sales produced enough contribution margin to cover 80% of fixed costs — the other 20% came out of your bank balance. A ratio of 1.2 means contribution margin covered fixed costs and produced 20% extra, which is your operating profit. A ratio of exactly 1.0 is break-even — fixed costs covered, no profit, no loss.

It is one of the few single numbers that gives an honest, immediate answer to "is the business paying for itself?" Operating margin and net margin can tell you the same thing in percentages; coverage ratio tells you in a multiple, which is often easier to feel. A 1.08× coverage is thin-margin profitable. A 1.5× coverage is healthy. A 0.9× coverage means you are losing 10% of fixed costs each month and the business is funded from somewhere else (savings, owner debt, the credit line).

How to calculate it

Fixed cost coverage ratio = Total contribution margin ÷ Total fixed costs

Where:
  Contribution margin = Net revenue − Variable costs
  Fixed costs         = Sum of monthly fixed-cost lines (rent, salaries, etc.)

Both numerator and denominator should be for the same period — usually a month. nouz tracks contribution margin daily (because COGS and variable cost are captured at entry time) and fixed costs from your fixed-cost setup, so the coverage ratio can be read off any day, any week or any month without recomputing.

Worked example

A café month. €18,000 of net revenue. Variable costs of €5,900 (32.8% variable cost ratio). Fixed costs of €6,000/month (rent €2,400, two salaries €2,800, insurance €200, software €100, other €500).

The café is comfortably profitable — contribution margin is 2× the fixed-cost stack, so half of contribution margin pays the bills and the other half becomes operating profit. €12,100 − €6,000 = €6,100 of EBIT on the month.

Now imagine a thinner cafe with €6,500 of monthly contribution margin and €6,000 of monthly fixed costs. Coverage = 1.08×. Technically profitable, but only €500 of buffer above break-even. One bad week of trading, one supplier price rise, one weekend of weather, and the ratio dips below 1.0. A coverage ratio of 1.08 is the line between "barely profitable" and "losing money next month" — owners who watch the ratio see the drift early; owners who don't watch it find out from the bank balance.

What is a healthy coverage ratio?

A ratio above 1.0 is profitable. The question is how much above. Rough guide:

• Below 1.0 — losing money. The shop is being subsidised by savings, debt, or unpaid owner labour.
• 1.0 to 1.1 — break-even to thin margin. One bad month flips you into loss. Not sustainable without buffer-building or price action.
• 1.1 to 1.3 — modest profit. Most small shops in their first 1-2 years sit here. Healthy enough to keep going, not yet healthy enough to absorb shocks.
• 1.3 to 1.6 — solid profit. Top half of mature owner-operated shops. Resilient against typical seasonal and supplier swings.
• Above 1.6 — strong profit. Either an exceptional operator, a favourable lease, or a high-margin niche. Worth understanding what is driving it so you can defend it.

These bands apply across most small-shop verticals — cafés, retail, salons, casual dining. E-commerce often runs lower because ad spend and shipping eat more of contribution margin. Service businesses (salons, repair shops) can run higher because variable costs are tiny.

Why it matters

Fixed cost coverage ratio is the cleanest answer to "did this month pay for itself?" Operating margin says the same thing in percentages; EBIT says the same thing in euros; coverage ratio says it in multiples. Many owners find the multiple easier to feel — "we covered our fixed costs 1.4 times this month" lands more clearly than "our operating margin was 12%." Whichever framing works, the underlying question is the same and the underlying number is the same.

Related concepts

• What fixed costs actually mean — the denominator of the coverage ratio.
• Break-even analysis — a coverage ratio of 1.0 is the break-even point.
• I make sales but no profit — what to do when coverage drops below 1.0 despite busy days.

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