{"id":19463,"date":"2024-09-05T15:50:51","date_gmt":"2024-09-05T14:50:51","guid":{"rendered":"https:\/\/www.sage.com\/en-gb\/blog\/?p=19463"},"modified":"2025-05-07T14:54:00","modified_gmt":"2025-05-07T13:54:00","slug":"calculate-margin-of-safety","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-gb\/blog\/calculate-margin-of-safety\/","title":{"rendered":"What is the margin of safety and how do you calculate it?"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-gb\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tWhat is the margin of safety and how do you calculate it?\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2024-09-05T15:50:51+01:00\">5 September, 2024<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"What is the margin of safety and how do you calculate it?\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-gb\/blog\/calculate-margin-of-safety\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author\">\n\t\t\t<div class=\"co-authors\">\n\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-gb\/blog\/author\/kieronjohnson\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/01\/Kieron-Johnson-350x350.jpg\" class=\"entry-author__image\" alt=\"kieron-johnson-profile-picture\" srcset=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/01\/Kieron-Johnson-350x350.jpg 350w, https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/01\/Kieron-Johnson.jpg 600w\" sizes=\"auto, (max-width: 40px) 100vw, 40px\" \/>\t\t\t\t<span class=\"entry-author__name\">Kieron Johnson<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n<p>As a small business owner, approaching your <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/calculate-break-even-point\/\" target=\"_blank\" rel=\"noreferrer noopener\">break-even point<\/a> is a bit like flying towards the sun.<\/p>\n\n\n\n<p>Every now and then, you&#8217;ll want to apply the &#8220;Icarus&#8221; test\u2014to find out just how close your business can get to breaking (without crashing and burning).<\/p>\n\n\n\n<p>This is where the formula for margin of safety comes in.<\/p>\n\n\n\n<p>In this article, we&#8217;ll walk you through what the margin of safety is, why it&#8217;s important, how to calculate the margin of safety, and how to improve it.<\/p>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#h-why-is-the-margin-of-safety-important\" data-level=\"2\">Why is the margin of safety important?<\/a><\/li><li><a href=\"#h-how-to-calculate-margin-of-safety\" data-level=\"2\">How to calculate margin of safety<\/a><ul><li><a href=\"#h-margin-of-safety-as-a-percentage\" data-level=\"3\">Margin of safety (as a percentage)<\/a><\/li><li><a href=\"#h-margin-of-safety-per-unit-sold\" data-level=\"3\">Margin of safety (per unit sold)<\/a><\/li><\/ul><\/li><li><a href=\"#h-what-is-a-good-margin-of-safety\" data-level=\"2\">What is a &#8220;good&#8221; margin of safety?<\/a><\/li><li><a href=\"#h-how-to-improve-margin-of-safety\" data-level=\"2\">How to improve margin of safety<\/a><\/li><li><a href=\"#h-final-thoughts\" data-level=\"2\">Final thoughts<\/a><\/li><\/ul><\/div>\n\n\n<div class=\"single-cta\">\n\t<a\n\t\tclass=\"button button--primary gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t\trole=\"button\"\n\t\tdata-button-location=\"content_area\"\n\t\thref=\"#gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t>Download your free small business toolkit and use the checklists and templates to manage your accounting, payroll and HR business admin with ease<\/a>\n<\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-why-is-the-margin-of-safety-important\"><strong>Why is the margin of safety important?<\/strong><\/h2>\n\n\n\n<p>The margin of safety is a measure of how far your sales can fall before your business breaks even\u2014the point where revenues equal costs, so your business doesn&#8217;t make a profit or sustain a loss.<\/p>\n\n\n\n<p>There&#8217;s an inverse relationship between the margin of safety and <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/sound-advice-how-to-come-back-from-bankruptcy-frankie-thorogood\/\" rel=\"noopener noreferrer\">insolvency<\/a>: the higher your margin of safety, the lower your risk of insolvency.<\/p>\n\n\n\n<p>The margin of safety has a number of practical applications to your business.<\/p>\n\n\n\n<p>Firstly, you can use it to assess the risk of your products or services. A higher margin of safety points to a lower risk of incurring losses if your sales take a tumble.<\/p>\n\n\n\n<p>Secondly, the margin of safety enables you to make informed decisions about <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/how-to-set-your-price-pricing-strategies-and-methods\/\" target=\"_blank\" rel=\"noreferrer noopener\">how to price your products or services<\/a>. For example, if it is on the lower side, you may want to think about adjusting your prices to boost sales.<\/p>\n\n\n\n<p>Thirdly, it helps you find the production &#8220;sweet spot,&#8221; where your production levels aren&#8217;t set too high (over-production) or too low (under-production).<\/p>\n\n\n\n<p>Fourthly, knowing the margin of safety positions you to make better judgement calls when it comes to investing in new products, services, or existing <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/what-is-inventory\/\" target=\"_blank\" rel=\"noopener noreferrer\">inventory<\/a>. A higher margin, for instance, indicates that your investment has less risk attached to it.<\/p>\n\n\n\n<p>Lastly, having an understanding of how far sales can decline before your business becomes unprofitable makes for more accurate <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/create-budget-for-your-business\" target=\"_blank\" rel=\"noopener noreferrer\">budgets<\/a> and <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/cash-flow-forecasting-small-businesses\/\" target=\"_blank\" rel=\"noopener noreferrer\">forecasting<\/a>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-calculate-margin-of-safety\"><strong>How to calculate margin of safety<\/strong><\/h2>\n\n\n\n<p>To calculate the margin of safety, you&#8217;ll need to comb through your bookkeeping records or access your accounting programs to collect 2 sets of figures: actual (or budgeted) sales and break-even sales.<\/p>\n\n\n\n<p>You can then calculate margin of safety in 3 ways: in pounds, as a percentage, or per unit sold.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p>The formula for margin of safety (in pounds) is as follows:<\/p>\n\n\n\n<p><strong><em>Actual (or budgeted sales) &#8211; break-even sales <br><\/em><\/strong><\/p>\n\n\n\n<p>To calculate the margin of safety, subtract your company&#8217;s break-even sales from its actual (or budgeted) sales.<\/p>\n\n\n\n<p>For example, if your company makes \u00a3500,000 in sales with break-even sales of \u00a3200,000, its margin of safety is <strong>\u00a3300,000<\/strong>.<\/p>\n\n\n\n<p>What this means is that your company has a buffer of \u00a3300,000, which is the amount of money it can afford to lose before breaking even, which is the last stop before unprofitability.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-margin-of-safety-as-a-percentage\"><strong>Margin of safety (as a percentage)<\/strong><\/h3>\n\n\n\n<p>Here&#8217;s the formula for margin of safety (as a percentage):<\/p>\n\n\n\n<p><strong><em>Actual (or budgeted sales) &#8211; break-even sales \/ actual (or budgeted sales) x BY 100 <br><\/em><\/strong><\/p>\n\n\n\n<p>In the above example, the margin of safety is calculated as follows:<\/p>\n\n\n\n<p><strong>Actual (or budgeted) sales:<\/strong> \u00a3500,000<\/p>\n\n\n\n<p><strong>Break-even sales:<\/strong> \u00a3200,000<\/p>\n\n\n\n<p><strong>Formula:<\/strong> \u00a3500,000 &#8211; \u00a3200,000 = \u00a3300,000 \/ \u00a3500,000 = 0.6 x 100 = 60<\/p>\n\n\n\n<p><strong>Margin of safety:<\/strong> 60%<\/p>\n\n\n\n<p>This means the company can lose 60% of its sales before reaching its break-even point.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-margin-of-safety-per-unit-sold\"><strong>Margin of safety (per unit sold)<\/strong><\/h3>\n\n\n\n<p>The formula for margin of safety (per unit sold) is:<\/p>\n\n\n\n<p><strong><em>Actual (or budgeted sales) &#8211; break-even point \/ selling price per unit <br><\/em><\/strong><\/p>\n\n\n\n<p>Imagine your company sells high-end candles at \u00a3100 each, the margin of safety calculation would look like this:<\/p>\n\n\n\n<p><strong>Actual (or budgeted) sales:<\/strong> \u00a3200,000<\/p>\n\n\n\n<p><strong>Break-even point:<\/strong> \u00a3100,000<\/p>\n\n\n\n<p><strong>Selling price per unit:<\/strong> \u00a3100<\/p>\n\n\n\n<p><strong>Per unit sold formula:<\/strong> \u00a3200,000 &#8211; \u00a3100,000 \/ 100 = 1000<\/p>\n\n\n\n<p><strong>Margin of safety:<\/strong> 1,000<\/p>\n\n\n\n<p>This means your candle business has a cushion of 1,000 units before it becomes unprofitable. In other words, it can afford to lose 1,000 candles and still manage to break-even.<\/p>\n\n\n\n<p>This buffer allows your business to experiment with new candle designs or marketing campaigns without the imminent risk of making a loss.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-a-good-margin-of-safety\"><strong>What is a &#8220;good&#8221; margin of safety? <\/strong><\/h2>\n\n\n\n<p>The ideal margin of safety varies from one business to another but, generally speaking, the higher your margin of safety, the safer your business is.<\/p>\n\n\n\n<p>Ultimately, the minimum margin of safety to target depends on your cost structure.<\/p>\n\n\n\n<p>If most of your business costs are variable, a margin of safety of 20 to 25% may be reasonable, especially if you can reduce costs during slow periods.<\/p>\n\n\n\n<p>But if your business has mostly fixed costs, it&#8217;s preferable to have a higher minimum margin of safety \u2014 somewhere along the lines of 50%, but ideally around the 70 to 75% mark.<\/p>\n\n\n\n<p>If your business has a margin of safety of 50%, it&#8217;s acceptable assuming there are minimal fixed costs. If your sales decline, you can probably cut back on <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/profit-and-loss-account-financial-statement\/\" target=\"_blank\" rel=\"noopener noreferrer\">variable costs<\/a>.<\/p>\n\n\n\n<p>By contrast, if your business has mostly fixed costs, its margin of safety is relatively low and you may want to consider ways to improve it.<\/p>\n\n\n<div class=\"single-cta\">\n\t<a\n\t\tclass=\"button button--primary gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t\trole=\"button\"\n\t\tdata-button-location=\"content_area\"\n\t\thref=\"#gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t>Download your free small business toolkit and use the checklists and templates to manage your accounting, payroll and HR business admin with ease<\/a>\n<\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-improve-margin-of-safety\"><strong>How to improve margin of safety<\/strong><\/h2>\n\n\n\n<p>There are only 2 ways your business can improve its margin of safety: reduce costs or increase revenue.<\/p>\n\n\n\n<p>You can reduce costs by:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Removing product lines or services with the lowest profit margins<br><\/li>\n\n\n\n<li>Producing more units with the same resources<br><\/li>\n\n\n\n<li>Buying infrastructure, such as software as-a- service as opposed to buying it outright<br><\/li>\n<\/ul>\n\n\n\n<p>As for revenue-increasing methods, they include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Increasing the price of your goods or services<br><\/li>\n\n\n\n<li>Introducing a new pricing structure<br><\/li>\n\n\n\n<li>Growing your marketing campaign<br><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-final-thoughts\"><strong>Final thoughts<\/strong><\/h2>\n\n\n\n<p>When you&#8217;re on the cusp of making an important decision in any business, risk assessment is key.<\/p>\n\n\n\n<p>One way of calculating the level of risk your business has is the formula for margin of safety.<\/p>\n\n\n\n<p>But the margin of safety isn&#8217;t a static figure. It&#8217;s a constantly moving target when your business is incurring extra operating costs with new break-even points.<\/p>\n\n\n\n<p>For this reason, it&#8217;s important to re-calculate the margin of safety regularly, particularly when your business sees a significant uptick in costs.<\/p>\n\n\n\n<p>Any revenue that pushes your business above the point of breaking even contributes to its margin of safety. And equally, any application of the formula for margin of safety can potentially contribute to business longevity.<\/p>\n\n\n\n \n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Get your free small business toolkit<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p><!-- wp:paragraph --><\/p>\n<p>Need help with accounting, payroll and HR admin for your business? This toolkit comprises free templates and checklists to help you manage your key business admin tasks with ease.<\/p>\n<p><!-- \/wp:paragraph --><\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Download the toolkit<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2022\/04\/GettyImages-1261586981-1440x810.jpg\" class=\"single-cta__image\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2022\/04\/GettyImages-1261586981-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Knowing the formula for margin of safety helps you measure how much sales can fall before your business becomes unprofitable.<\/p>\n","protected":false},"author":1766,"featured_media":19481,"menu_order":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[6],"tags":[197,135,12],"business_type":[4],"lilypad":[],"context":[],"industry":[],"persona":[],"imagine_tag":[91],"coauthors":[402],"class_list":["post-19463","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","tag-business-costs","tag-business-finances","tag-start-business","business_type-small-business"],"sage_meta":{"region":"en-gb","author_name":"Kieron Johnson","featured_image":"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/09\/Woman-calculating-margin-of-safety.jpg","imagine_tags":{"91":"Growing business"}},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice UK","distributor_original_site_url":"https:\/\/www.sage.com\/en-gb\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts\/19463","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/users\/1766"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/comments?post=19463"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts\/19463\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/media\/19481"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/media?parent=19463"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/categories?post=19463"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/tags?post=19463"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/business_type?post=19463"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/lilypad?post=19463"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/context?post=19463"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/industry?post=19463"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/persona?post=19463"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/imagine_tag?post=19463"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/coauthors?post=19463"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}