Margin of Safety Analysis

The margin of safety (MOS) measures the gap between the actual revenue and the break even revenue.

As a business will break even at the break even revenue, the margin of safety indicates by how much the revenue must fall before the business starts to make a loss.

Actual revenue
Break even revenue Margin of safety

Using actual revenue, the margin of safety formula is as follows:

MOS = Actual revenue – Break even revenue

If dealing with budgets, then the actual revenue can be replaced with budgeted revenue.

The Margin of Safety Percentage

The safety margin can also be expressed as a percentage of the actual revenue giving the MOS percentage formula.

Margin of safety percentage = Margin of safety / Actual revenue

The percentage is sometimes referred to as the margin of safety ratio or MOS ratio.

Calculate MOS

As an example of the MOS calculation, suppose a business has revenue of 100,000 and the break even revenue is calculated to be 90,000, then using the formula, the safety margin is given by 100,000 – 90,000 = 10,000.

Alternatively this can be expressed as a percentage of the actual revenue giving the MOS percentage as 10,000 / 100,000 = 10%.

Above the break even revenue the business will make a profit, so in this example, the revenue can fall by 10,000 or 10% before the business starts to make a loss.

The same process can be applied using units instead of revenue, if in the above example, the unit selling price was 50.00, then the actual units are 100,000/50 = 2,000, and the beak even units are 90,000 / 50 = 1,800. The safety margin in units is then 2,000-1,800 = 200 units or expressed as a MOS percentage 200 / 2,000 = 10%.

Margin of Safety Analysis February 7th, 2017Team

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