The margin of safety measures how much extra sales you have over the minimum amount needed to break even. The break even point equals the amount of sales needed to cover all of your expenses. To calculate the margin of safety percentage, you must know the expected sales and the break even sales amount for your company. The larger the margin of safety percentage, the larger the buffer between your break even point and the anticipated sales.
Subtract from the projected sales the amount of sales you need to break even. For example, if you anticipate sales of $500,000, but only need $460,000 to break even, subtract $460,000 from $500,000 to get a safety margin of $40,000.
Divide the safety margin by the projected sales to find the margin of safety ratio. In this example, divide $40,000 by $500,000 to get 0.08.
Multiply the margin of safety ratio by 100 to find the margin of safety percentage. In this example, multiply 0.08 by 100 to get an 8 percent margin of safety.
