Margin of safety formula: how to calculate your buffer

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 how far your sales can drop before your business starts losing money.
• Aim for a margin of safety between 20% and 40% for most small businesses, with higher margins needed if you have high fixed costs or face unpredictable demand.
• Monitor your margin of safety at least quarterly to spot trends early and take corrective action before problems arise, such as adjusting pricing or cutting unnecessary expenses.
• Use your margin of safety alongside other financial metrics like cost-volume-profit analysis to make smarter decisions about pricing, cost management, and growth planning.

What is the margin of safety?

Margin of safety measures how far your sales can drop before your business hits its break-even point. It's the gap between your current sales and the minimum sales needed to cover all costs.

Think of it as your financial buffer. A wider margin means more room to absorb drops in demand or unexpected cost increases without losing money.

What is the margin of safety formula?

The margin of safety formula is:

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

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

Each component means:

• Current sales: your total revenue from selling goods and services over a specific period
• Break-even sales: the exact revenue needed to cover all fixed and variable costs, where profit equals zero

Example calculation:

A business has:

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

Margin of safety = ($50,000 − $30,000) ÷ $50,000 = 0.4 (40%)

This 40% margin of safety means sales could drop by 40% before the business starts losing money. For example, one company's margin of safety is 32%, which meant it could withstand a $72,000 drop in sales before reaching its break-even point.

How to calculate margin of safety

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

Find your current sales

Current sales is your total revenue over a specific period. Use actual figures from recent months, or forecast future sales if planning ahead.

Find your actual sales figures through:

• POS systems: Track daily and monthly transaction totals
• eCommerce platforms: Pull revenue reports from your online store
• Accounting software: Run sales reports in tools like Xero

For forecasted sales, use these methods:

• Historical data: Analyse past trends and seasonal patterns from your financial reports
• Market research: Study your target market, industry trends, and competitor performance
• Expert input: Gather insights from your sales team or industry advisors
• Statistical methods: Use quantitative analysis to predict future sales from historical data

Example: A craft business uses its POS system to track monthly sales. Last month, sales were $5,000. This figure feeds into the margin of safety calculation.

Calculate your break-even sales revenue point

Break-even sales revenue is the total income needed to cover all your costs, resulting in zero profit and zero loss.

Use this formula to calculate it:

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

Each term means:

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

Here's more info on variable costs and how they differ from fixed costs.

Example calculation:

A craft business has:

• Fixed costs: $2,000
• Variable costs: $5 per unit
• Sales price: $25 per unit

Calculation:

$2,000 ÷ (($25 − $5) ÷ $25) = $2,000 ÷ 0.8 = $2,500

The business needs $2,500 in revenue (100 units at $25 each) to break even.

Learn more about your break-even point.


Apply the margin of safety formula

Apply the margin of safety formula using your figures from steps 1 and 2:

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

The result is your margin of safety ratio, expressed as a percentage. This shows how far sales can drop before your business starts losing money.

Example calculation:

Using the craft business figures:

• Current sales: $5,000
• Break-even sales: $2,500

Calculation:

($5,000 − $2,500) ÷ $5,000 = $2,500 ÷ $5,000 = 0.5 (50%)

A 50% margin of safety means sales could fall by half before the business reaches its break-even point.

What is a good margin of safety percentage?

A good margin of safety depends on your industry, cost structure, and risk tolerance, though many businesses aim for a margin of safety of 20% or more to establish a healthy buffer. Learn more about margin of safety.

As a general guide:

• Below 20%: High risk, operating close to break-even with little room for error, with some research suggesting that anything below 10% indicates high risk and limited flexibility. Learn more about margin of safety benchmarks.
• 20% to 40%: Moderate buffer, suitable for businesses with predictable costs and steady demand.
• Above 40%: Strong cushion, providing significant protection against sales drops or cost increases.

Several factors affect what percentage works for your business:

• Variable vs fixed costs: Businesses with mostly variable costs can operate safely with lower margins (20–25%) because they can reduce costs when sales drop.
• Industry volatility: Seasonal or unpredictable industries need higher margins to weather slow periods.
• Growth stage: Newer businesses may accept lower margins while building sales, but should aim to increase their buffer over time.
• Economic conditions: Uncertain markets call for wider margins to protect against unexpected downturns.

What to do with your result:

• Margin below 20%: Review your pricing, cut unnecessary costs, or find ways to boost sales.
• Margin between 20–40%: Monitor regularly and look for opportunities to widen your buffer.
• Margin above 40%: You have strong protection, but consider whether you could invest more in growth.

The importance of the margin of safety for your small business

Margin of safety shows how much cushion your business has before it starts losing money. It's a core part of your risk management strategy.

Your margin tells you:

• High margin (above 40%): Your business can absorb sales dips or cost increases without major disruption.
• Low margin (below 20%): You're operating close to break-even with little room for unexpected changes.

Consider how an external shock affects your position. A jump in supplier prices pushes up your break-even point, shrinking your margin of safety and leaving you more exposed to further cost increases or falling sales.

How the margin of safety supports your business decisions

Margin of safety helps you make smarter decisions across your business. Apply it by:

• Set performance targets: Use your break-even point to establish clear, achievable sales goals.
• Review pricing: Check that each sale contributes enough to cover costs if your margin is shrinking.
• Control costs: Cut expenses to protect your buffer when your margin of safety drops too low.
• Evaluate new offerings: Assess how a new product or service affects your margin before launching.

Beyond these applications, margin of safety works best when combined with other financial metrics.

Other metrics work with the margin of safety in your accounting analysis

Margin of safety works best alongside other financial metrics. When combined with cost-volume-profit (CVP) analysis, it gives you a clearer view of profitability and risk than either metric provides alone.

Margin of safety and CVP analysis

Cost-volume-profit (CVP) analysis is a planning tool that models how changes in costs, sales volume, and pricing affect your profitability. For example, CVP analysis can determine that a company must sell over 22,000 units to earn at least $100,000 in net income. Margin of safety is one output of this analysis.

They differ in these ways:

• Margin of safety: Shows your current financial buffer based on today's figures.
• CVP analysis: Projects future scenarios to help you plan for different outcomes.

Together, these tools give you a complete picture of both your current position and future possibilities. Use them to guide pricing decisions, cost management, and growth planning.

Learn more about management accounting and decision-making

Master your margin of safety with Xero

Xero makes calculating your margin of safety faster and easier.

With Xero, you get:

• Quick access to sales data: Pull current sales figures directly from your reports.
• Real-time financial insights: See your break-even point and margins without manual calculations.
• Customisable reports: Generate the numbers you need for margin of safety analysis.

Spend less time on admin and more time making confident financial decisions. Learn more about Xero's reporting features or get one month free.

FAQs on margin of safety

Here are answers to common questions about calculating and using margin of safety for your business.

What is a good margin of safety percentage?

A margin of safety between 20% and 40% is generally considered healthy for most small businesses. If your costs are mostly variable, you can operate safely closer to 20%; if you have high fixed costs or face unpredictable demand, aim for 40% or higher.

How often should I calculate my margin of safety?

Calculate your margin of safety at least quarterly, or monthly if your sales or costs fluctuate significantly. Regular monitoring helps you spot trends early and adjust before problems arise.

Can my margin of safety be negative?

Yes. A negative margin of safety means your current sales are below your break-even point, and you're operating at a loss. Even a very low positive margin is a risk; for instance, one company had a margin of safety of 5.8%, leaving it with very little cushion against a drop in revenue. Learn more about the margin of safety formula.

How is margin of safety different from profit margin?

Margin of safety measures how far sales can drop before you lose money. Profit margin measures how much profit you make on each dollar of sales. Both are useful, but they answer different questions about your business health.

What should I do if my margin of safety is too low?

Take action to widen your buffer: review your pricing using the margin calculator, calculate your margin to ensure each sale covers costs, reduce unnecessary expenses, focus on increasing sales volume, or negotiate better terms with suppliers.