What is fixed cost coverage ratio?

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. As a rough guide by sector, the ranges below show where a mature, owner-operated single location tends to sit — treat them as rules of thumb, not targets, and always judge your own drift over 12 months first.

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.

Common mistakes

Coverage ratio is only as honest as the two numbers you feed it. These are the errors that make a shop believe it is covering its costs when it isn't — or the reverse.

• Leaving owner pay out of fixed costs. If the owner draws a market-rate wage, it belongs in the fixed-cost stack. Omit it and a shaky 0.95× shop reads as a comfortable 1.2× — the gap is the owner's unpaid labour propping the ratio up.
• Mismatched periods. Numerator and denominator must cover the same window. Comparing a strong month's contribution margin against an average month's fixed costs (or vice versa) produces a ratio that describes no real month at all.
• Counting variable costs as fixed. COGS, packaging and card fees are variable — they already came out to get contribution margin. Double-counting them by also stuffing them into the denominator understates coverage badly.
• Reading one month as the verdict. A seasonal dip can drop coverage below 1.0 for a slow month in an otherwise healthy year. Look at the rolling three-month ratio before concluding the business does not pay for itself.
• Chasing a very high ratio blindly. A 2.0×+ coverage can mean an exceptional operator — or a shop that is under-investing in staff and marketing and will stall. A high ratio is worth understanding, not just celebrating.

How it shows up in your daily P&L

You do not have to wait for a month-end close to read your coverage ratio. In nouz the daily P&L runs the same chain every day: gross revenue minus tax minus card fees gives net revenue; net revenue minus COGS minus variable costs gives the day's contribution margin; subtract the day's slice of fixed cost and you have EBIT. Coverage ratio is just that day's contribution margin divided by that day's fixed slice — the two numbers are already on screen.

Read across a rolling month, the ratio tells you whether the shop is on track to cover itself before the month is over. A coverage sliding from 1.3× toward 1.05× over three weeks is the drift you want to catch on week two, while a price tweak or a supplier call can still pull it back — not at month-end when the loss is already banked. Same-day EBIT turns "did we pay for ourselves?" from a backward-looking question into a live one.

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.

Common questions