Margin of safety formula: how to calculate & use it

Published Friday 13 February 2026

Table of contents

• What is the margin of safety?
• What is the margin of safety formula?
• How to calculate margin of safety
• What is a good margin of safety percentage?
• The importance of the margin of safety for your small business
• How the margin of safety supports your business decisions
• Margin of safety and CVP analysis
• Master your margin of safety with Xero
• FAQs on margin of safety

Key takeaways

• Calculate your margin of safety using the formula (Current sales − Break-even sales) ÷ Current sales to determine what percentage your sales can drop before your business stops making money.
• Aim for a margin of safety of 20% or more to create a healthy financial buffer, though businesses with stable revenue may operate comfortably with lower percentages while volatile businesses need larger margins.
• Use your margin of safety to make smarter business decisions by setting realistic sales targets, adjusting prices when margins shrink, and evaluating whether new products or services will strengthen or weaken your financial position.
• Monitor your margin of safety regularly through monthly or quarterly calculations to quickly identify changes in your business's financial health and respond to shifts in sales or costs before they become critical.

What is the margin of safety?

The margin of safety is the percentage by which your sales can drop before your business reaches its break-even point. At break-even, revenue equals costs and you make neither a profit nor a loss.

Think of it as your financial buffer against unexpected drops in demand or rising costs. The wider your margin of safety, the more room you have to absorb setbacks without losing money.

What is the margin of safety formula?

Once you understand the concept, you'll want to know how to calculate it.

The margin of safety formula is:

(Current sales − Break-even sales) ÷ Current sales = Margin of safety

Here's what each component means:

• Current sales: your business's total revenue over a specific period
• Break-even sales: the exact amount of revenue needed to cover all fixed and variable costs

The result is expressed as a percentage, showing how far sales can fall before you start losing money.

Here's a quick example.

Your business has:

• Current sales: $50,000
• Break-even sales: $30,000

Calculation: ($50,000 − $30,000) ÷ $50,000 = 0.4 (40%)

What this means: Sales could drop by 40% before your business hits break-even. Any further decline would result in a loss.

The margin of safety calculation is set out in more detail below.

How to calculate margin of safety

Now let's break down the margin of safety calculation step by step.

1. Find your current sales

Start by determining your current sales, whether actual or forecasted. Your current sales figures should be readily available through your existing sales tools.

Forecasting takes a bit more analysis. Here are four common approaches:

• Analyse historical data: review your financial reports for past sales trends and seasonal patterns using your POS system, eCommerce platform, or accounting software like Xero
• Research your market: study your target market, industry trends, and competitor performance
• Use qualitative forecasting: ask your sales team or industry experts for their insights
• Use quantitative forecasting: apply statistical methods to analyse historical and market data for more accurate predictions

The best approach depends on your business type and the data available to you. For example, if you run a craft business and use a POS system to track monthly sales, and last month's sales were $5,000, use this figure in future steps of the margin of safety calculation.

1. Calculate your break-even sales revenue point

The break-even point is typically expressed as the number of units you need to sell to cover all costs. But for the margin of safety calculation, you need a revenue figure instead.

Break-even sales formula:

Fixed costs ÷ ((Sales price − Variable cost) ÷ Sales price) = Break-even sales

Here's what each term means:

• Fixed costs: expenses that stay the same regardless of sales volume, such as salaries and rent
• Variable costs: expenses that change with sales volume, such as raw materials and sales commission

Learn more about variable costs and how they differ from fixed costs. Your accountant can also help you distinguish between them.

To demonstrate, let's say your craft business has:

• Fixed costs of $2,000
• Variable costs of $5 per unit
• A sales price of $25 per unit

Therefore:

2,000 ÷ ((25 – 5) ÷ 25) = Break-even sales revenue = 2,000 ÷ (20 ÷ 25) = 2,000 ÷ 0.8 = $2,500

So with a sales price of $25, you need revenue of $2,500 (100 sales units) to break even.

Learn more about the break-even point formula.


1. Apply the margin of safety formula

Finally, apply the margin of safety formula:

(Current sales – Break-even sales) ÷ Current sales = Margin of safety

The result is your margin of safety ratio – the percentage by which sales can fall before your business starts operating at a loss.

Let's apply the formula to your craft business example, where current sales are $5,000 and the break-even point for sales revenue is $2,500:

($5,000 – $2,500) ÷ $5,000 = Margin of safety = 2,500 ÷ 5,000 = 0.5 = 50%

Your craft business has a 50% margin of safety, meaning sales could fall by half before you reach the break-even point.

What is a good margin of safety percentage?

Once you have your margin of safety percentage, you'll want to know if it's a good number. While a higher percentage is always better, many businesses aim for a margin of safety of 20% or more. This figure suggests a healthy buffer between your sales and your break-even point. Learn more in this CVP analysis guide.

A percentage around 10% means you have less room to absorb sales fluctuations, so you may want to focus on building a larger buffer. The ideal percentage can vary by industry. A business with stable, predictable revenue might be comfortable with a lower margin, while a seasonal or volatile business should aim for a much larger one to protect its cash flow.

The importance of the margin of safety for your small business

The margin of safety is essential to your risk management strategy. It shows how far sales can fall before your business starts losing money.

• High margin of safety: your risk is low, and your business can absorb shifts without major disruption
• Low margin of safety: your risk is higher, and you're operating close to break-even with less room to manoeuvre

Consider how external changes would affect your business. A jump in supplier prices, for example, increases your variable costs and pushes up your break-even point. This eats into your margin of safety and leaves you more exposed. In one case, an investment resulted in a margin of safety of just 5.8%. Learn more about the margin of safety formula.

Your margin of safety also supports smarter financial decisions across your business. See the section below on how the margin of safety supports your small business decisions.

How the margin of safety supports your business decisions

Your margin of safety helps you make better decisions in key areas of your business:

• Set performance targets: calculate your break-even point to set clear, achievable sales targets, and even determine the sales volume needed to achieve a target profit
• Set prices: review your pricing if your margin of safety is shrinking to ensure each sale covers costs
• Control costs: treat a low margin of safety as a signal to cut costs and protect your buffer
• Evaluate new products or services: assess how the costs of a proposed new offering affect your margin of safety before launching

Your margin of safety becomes even more powerful when combined with other financial metrics.

Using margin of safety with other metrics

The margin of safety works best alongside other key financial metrics. For example, combining it with CVP analysis gives you a clearer view of both profitability and risk than either metric alone.

Margin of safety and CVP analysis

Cost-volume-profit (CVP) analysis is a forward-looking exercise that models how changes to your cost structure, sales volume, and pricing affect profitability. It shows how adjusting any of these factors, up or down, affects your bottom line.

The margin of safety is an output of CVP analysis. While your margin of safety highlights the financial buffer you have today, CVP helps you plan for different scenarios.

Used together, CVP analysis and margin of safety guide your planning by giving you a clearer view of both profitability and risk.

Learn more about management accounting and decision-making.

Master your margin of safety with Xero

Calculating your margin of safety can be time-consuming. You need to track down figures, update spreadsheets, and manually piece together reports.

Xero takes the manual work out of the process:

• Access financial data quickly: find the figures you need without scouring multiple reports
• Automate calculations: spend less time on spreadsheets and more time on decisions
• Get real-time insights: make informed choices with up-to-date numbers

Get one month free and see how Xero simplifies your financial management.

FAQs on margin of safety

Here are answers to some common questions about the margin of safety.

How can I improve my margin of safety?

To improve your margin of safety, focus on three main areas. Try to increase your sales volume, raise your prices to improve your contribution margin, or reduce your fixed and variable costs to lower your break-even point.

What does a 50% margin of safety mean?

A 50% margin of safety means your sales could fall by half before your business stops making a profit. For example, if your break-even sales are 10,000 units and current sales are 20,000 units, that's a 50% margin. Learn more about CVP analysis. This indicates a very strong and healthy financial buffer.

How often should I calculate my margin of safety?

Calculate your margin of safety regularly, such as monthly or quarterly. This helps you monitor your business's financial health using tools like liquidity ratios and react quickly to changes in sales or costs.

Is margin of safety the same as profit margin?

No, they are different metrics. Margin of safety measures how much sales can drop before you hit your break-even point, focusing on risk. Profit margin measures how much profit you make as a percentage of revenue, focusing on profitability. Try the net profit margin calculator.