---
title: "Margin of safety"
description: "What the margin of safety is in accounting, how to calculate it in units, sales and as a percentage, its link to operating leverage, and a worked example."
canonical: https://ledgeriano.com/glossary/margin-of-safety
language: en
publisher: "Ledgeriano"
updated: 2026-11-06
---

# Margin of safety

> What the margin of safety is in accounting, how to calculate it in units, sales and as a percentage, its link to operating leverage, and a worked example.

The margin of safety is the amount by which actual or budgeted sales exceed break-even sales, expressed in units, in revenue or as a percentage of sales. It shows how far sales can fall before the business starts making a loss, which makes it a quick measure of operating risk for a budget, a product or a new location.

A margin of safety of 40% means sales could drop by 40% and the business would still break even. A margin of 5% means a single weak month erases the profit. Compare the margin with how much sales have actually varied in the past: if monthly sales often swing by 20%, a 15% margin is thin.

The margin of safety ratio is the inverse of the degree of operating leverage at the same sales level. A business with a 25% margin of safety has an operating leverage of 4: a 10% change in sales moves profit by about 40%.

Raise the margin by lowering break-even (cutting fixed costs or raising unit contribution) or by growing sales. The [break-even calculator](https://ledgeriano.com/tools/break-even-calculator) shows it alongside break-even when you enter expected sales.

```
Margin of safety = Expected sales - Break-even sales
Margin of safety % = (Expected sales - Break-even sales) ÷ Expected sales
Degree of operating leverage = 1 ÷ Margin of safety %
```

## Example: budgeted sales of 120,000

Break-even sales are 75,000 and budgeted sales are 120,000. The margin of safety is 45,000, or 37.5% of sales. Operating leverage is 1 ÷ 0.375 = 2.67, so a 10% fall in sales would cut profit by about 26.7%.

### What is a good margin of safety?

Higher is safer. Many managers look for at least 20% to 30%, but the right level depends on how volatile your sales are.

### Can the margin of safety be negative?

Yes. A negative margin means expected sales are below break-even and the plan forecasts a loss.

Guide: https://ledgeriano.com/guides/management-accounting