Margin of Safety Calculator
Monitor the profitability of your business with the help of Calcopolis.
What is the margin of safety?
The margin of safety calculator allows you to find out how much and if the sales surpass the break-even point. It is the basic accounting metric that every business owner needs to track to monitor his company's performance.
How to calculate the margin of safety?
The calculation of this metric is pretty straightforward; it is simply the ratio of sales above the break-even point divided by the total amount of sales. The result is usually expressed as a percentage value.
The margin of safety formula
MoS = (SALES - BEP) / SALES * 100%
Where:
- SALES - the total amount of sales in dollars
- BEP - Break Event Point value in dollars
The margin of safety in units
Alternatively, you can calculate the number of units you sell above the break-even point. In order to do so, you need to slightly modify the formula:
MoS = (SALES - BEP) / PRICE * 100%
Where:
- SALES - the total amount of sales in dollars
- BEP - Break Event Point value in dollars
- PRICE - Selling price of a single unit
How do we increase the margin of safety?
The margin of safety may be increased in several ways: by growing the sales, lowering the operating costs, or increasing the gross margin.
Of course, growing sales is obvious, but the other two should not be forgotten. Sometimes increasing sales by applying higher markup is the easiest solution.
In the long run, each company should keep its operating costs under control. Lowering the business costs either by renegotiating the rents or purchase prices may positively impact the break-even point value and therefore increase the margin of safety.
It is important to note that with higher sales, the relative value of the operating costs to the sales may decrease because, with higher sales, the share of the fixed costs tends to decrease.
Things to watch out
It is crucial to focus on the effective prices, not the SRP prices. If you have an extensive discount policy or organized big markdowns, the real prices you charge your customers may be lower than in ad-hoc simulations.
Therefore you need to input precise values from your ERP system in order to keep track of the real performance of your company.
The tools that may help you analyze your discount policy are the discount calculator and markdown calculator.
Authors
Created by Lucas Krysiak on 2022-06-11 13:24:23 | Last review by Mike Kozminsky on 2022-06-15 14:06:40