The Margin of Safety is a measure or Key Performance Indicator (KPI) of how far your sales can fall before reaching your breakeven point.  It is a measure of risk, stating as a percentage how many sales you can afford to lose before you start make a loss.

It is calculated as follows:

(Current Sales level – Breakeven Point) / Current Sales level

Your Breakeven point is calculated as follows:

Fixed Expenses / (Revenue – COGS) / Revenue

http://www.mcnamaraandco.com/blog/how-to-calculate-your-break-even-point

The breakeven point is essentially the amount of sales you need to generate to make 0 loss or 0 profit.

The Margin of Safety demonstrates the buffer that your business has as a percentage.  If you have a sales pattern that varies from month to month an average would be best used.

Example of Margin of Safety calculation:

Sales                          $750,000
COS / COGS                  $450,000
Fixed Expenses          $210,000
Profit                           $90,000

Break Even Point $210,000 / ($750,000 – $450,000) / $750,000 = $525,000

Therefore, once your sales fall below $525,000 you will start to lose money.

Therefore your Margin of Safety is
($750,000 - $525,000) / $750,000 = 30%,

i.e. your sale could drop by 30% before you start to lose money.

If you would like to discuss further please contact us:
McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com
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