Margin of Safety
Definition
The gap between actual or budgeted sales and the break-even point, showing how far sales can fall before the business makes a loss. A larger margin of safety means lower risk.
Formula
Margin of safety = (Actual sales − Break-even sales) ÷ Actual sales × 100
Related Terms in Financial Analysis
Operating Leverage
The degree to which a business's costs are fixed rather than variable. High operating leverage means profits rise fast as sales grow past break-even — but fall just as fast when sales decline.
Variance Analysis
Comparing actual results against budget or standard figures and investigating the differences. It helps managers understand why performance differed from plan and where to act.
Horizontal Analysis
Comparing financial statement figures across multiple periods to spot trends and growth rates. It reads the accounts left to right, period over period.
Vertical Analysis
Expressing each line of a financial statement as a percentage of a base figure — revenue for the income statement, total assets for the balance sheet — to compare structure across periods or businesses of different sizes.
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