What does the margin of safety measure?

The margin of safety measures the difference between actual or projected sales and the break-even point. This concept is crucial for businesses as it indicates how much sales can decline before the company incurs a loss. It provides insights into the risk level associated with current sales figures. A higher margin of safety suggests a lower risk of not covering costs, while a smaller margin of safety indicates a higher risk, leading to potential financial challenges if sales decrease.

The importance of this metric lies in its ability to inform decision-making, allowing businesses to assess the viability of their operations and make strategic adjustments if necessary. Understanding the margin of safety helps in evaluating the impact of changes in the market or operational efficiencies on overall profitability and risk exposure.