Margin of safety formula: how to calculate your buffer

Published Thursday 19 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
• Use Xero to simplify your margin of safety tracking
• 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 hits break-even and starts losing money.
• Aim for a margin of safety between 20%–50% as this range provides a healthy buffer to absorb unexpected drops in sales or increases in costs without immediately falling into a loss.
• Use your margin of safety to make better business decisions by setting realistic sales targets, adjusting pricing when margins shrink, controlling costs when buffers are low, and evaluating the financial impact of new products.
• Monitor your margin of safety monthly or quarterly and recalculate whenever you make significant changes to pricing, costs, or sales forecasts to spot trends before they become problems.

What is the margin of safety?

The margin of safety measures how far your sales can drop before your business hits its break-even point, where revenue equals costs and you make neither a profit nor a loss.

Think of it as your financial buffer against falling demand or rising costs. The wider this margin, the more room you have to absorb unexpected changes without slipping into a loss.

What is the margin of safety formula?

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 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 your business makes zero profit and zero loss

Here's a quick example.

A business has current sales of $50,000 and needs $30,000 to break even.

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

This means sales could drop by 40% before the business hits break-even. Any further decline would result in a loss.

How to calculate margin of safety

Follow these three steps to calculate your margin of safety.

1. Find your current sales

Current sales is your total revenue over a specific period, whether actual or forecasted.

Your actual sales figures should be easy to find through your existing sales tools. Forecasting takes a bit more analysis. Here are four common approaches:

• review historical data: analyse your financial reports for past sales trends and seasonal patterns using your POS system, eCommerce platform, or accounting software like Xero
• conduct market research: study your target market, industry trends, and competitor performance
• gather qualitative insights: ask your sales team or industry experts for their perspectives
• apply quantitative methods: use statistical analysis on your historical and market data to predict future sales

The best approach depends on your business type and available data.

For example, a craft business uses a POS system to track monthly sales. Last month, sales were $5,000. This figure is used in the next steps.

2. Calculate your break-even sales revenue point

Break-even sales revenue is the exact amount of revenue needed to cover all your costs, where you make zero profit and zero loss.

Here's the formula:

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

In this formula:

• fixed costs are expenses that stay the same regardless of sales volume, such as salaries and rent
• variable costs are expenses that change with sales volume, such as raw materials and sales commission

Here's more on variable costs and how they differ from fixed costs. Your accountant can also help you distinguish between them.

Using the craft business example:

• fixed costs: $2,000
• variable costs: $5 per unit
• sales price: $25 per unit

The calculation:

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

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

Read more about the break-even point formula.

3. Apply the margin of safety formula

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.

For the craft business with current sales of $5,000 and break-even sales of $2,500:

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

The craft business has a 50% margin of safety, meaning sales could fall by half before reaching break-even.

What is a good margin of safety percentage?

After calculating your margin of safety, you need to know whether your result is healthy or risky.

A margin of safety of 20%–50% is generally considered healthy for most small businesses, as illustrated by one academic example where a company's margin of safety was 32%. This range gives you enough buffer to absorb unexpected drops in sales or increases in costs without immediately falling into a loss.

Here's how to interpret different ranges:

• above 50%: strong position with significant room to absorb shocks
• 20%–50%: healthy buffer for most industries and business models
• 10%–20%: tighter margin that warrants close monitoring
• below 10%: high risk, operating very close to break-even

Your ideal margin depends on several factors:

• industry volatility: businesses in unpredictable markets need wider margins
• fixed cost structure: higher fixed costs mean less flexibility, so a larger buffer helps
• growth stage: newer businesses may operate with tighter margins while scaling
• risk tolerance: conservative operators typically aim for 30% or higher

Using the craft business example, a 50% margin of safety is strong. Sales could drop by half before the business starts losing money, providing solid protection against seasonal slowdowns or unexpected expenses.

The importance of the margin of safety for your small business

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

• High margin: lower risk, with room to absorb market shifts without disruption
• Low margin: higher risk, operating close to break-even with less flexibility

Consider how an external shock, like a jump in supplier prices, would affect your business. Rising variable costs push up your break-even point, eating into your margin of safety and leaving you exposed to further cost increases or falling sales.

How the margin of safety supports your business decisions

Your margin of safety helps you make better decisions across your small business:

• set performance targets: calculate your break-even point to establish achievable sales targets that keep you profitable
• adjust pricing: if your margin is shrinking, review your prices so each sale contributes enough to cover costs. Even a small price reduction increases the number of services required to break even
• control costs: a low margin signals the need to cut expenses and protect your buffer, as even a small reduction in fixed costs can significantly lower the break-even revenue needed
• evaluate new products: before launching something new, assess how additional costs affect your margin and profitability

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. The margin of safety is one output of CVP analysis.

While your margin of safety shows the financial buffer you have today, CVP analysis helps you plan for tomorrow. It reveals how adjusting any factor, up or down, affects your profitability.

The margin of safety works best alongside other key financial metrics like liquidity ratios. Used together, CVP analysis and margin of safety guide your planning by giving you a clearer view of both profitability and risk, with studies showing that managers rely on CVP to make quick cost-saving decisions during periods of economic instability.

Read about management accounting and decision-making.

Use Xero to simplify your margin of safety tracking

When you calculate your margin of safety manually, it can be time-consuming to track down figures, update spreadsheets, and piece together reports.

Xero gives you quick access to the sales data and cost breakdowns you need to work out your margin of safety faster. With real-time financial reports at your fingertips, you can make informed decisions with confidence. See how much time you can save with one month free.

FAQs on margin of safety

Still have questions about calculating or using your margin of safety? Here are answers to common questions from small business owners.

What's the difference between margin of safety and profit margin?

Margin of safety measures how far sales can drop before you reach break-even, while profit margin measures how much profit you make on each sale. Margin of safety is about risk; profit margin is about profitability.

How often should I calculate my margin of safety?

Calculate your margin of safety monthly or quarterly. Also recalculate whenever you make significant changes to pricing, costs, or sales forecasts. Regular monitoring helps you spot trends before they become problems.

Can my margin of safety be negative?

Yes. A negative margin of safety means your current sales are already below your break-even point, so you're operating at a loss. This means you should focus on increasing sales, raising prices, or cutting costs.

How can I improve a low margin of safety?

You can improve your margin of safety by increasing sales volume, raising prices, reducing variable costs, or lowering fixed costs. For instance, the difference between budgeted sales – break-even sales directly translates into a company's margin of safety in units.

Do I need to calculate margin of safety if I'm already profitable?

Yes. Knowing your margin of safety helps you prepare for future changes, even when you're currently profitable. Your margin of safety shows how much your sales can fall before you start losing money, helping you plan for uncertainty and make confident decisions.