How far actual or budgeted sales can fall before the business reaches its break-even point.
The margin of safety is the cushion between current or planned sales and the break-even point. It says how much of a sales drop the business can absorb before it starts losing money, which makes it a quick read on risk in a budget. It is stated in units, in revenue or as a percentage of sales.
Margin of safety = actual or budgeted sales − break-even sales. As a percentage: (actual sales − break-even sales) ÷ actual sales. Use units or revenue consistently on both sides.
With fixed costs of $150,000 and a $20 contribution per unit, break-even is 7,500 units. Budgeted sales of 10,000 units give a margin of safety of 2,500 units, $125,000 of revenue at $50 a unit, or 25% of sales.
Treated as fixed when fixed costs rise, a new lease or extra headcount, which lifts break-even and cuts the margin of safety. Computed for the whole business when one product line is below its own break-even. The full guide is break-even analysis.