How is margin of safety expressed as a percentage?

The margin of safety is a financial metric that indicates how much sales can decrease before a business reaches its breakeven point, where total revenues equal total costs. To express margin of safety as a percentage, the formula used is:

(Budgeted sales - Breakeven sales) / Budgeted sales * 100

This calculation takes the difference between budgeted sales, which represent expected sales, and breakeven sales, the point at which the company does not make a profit or loss. This difference (margin of safety) is then divided by the budgeted sales to provide a percentage that shows how much sales can decline before the business is at risk of incurring losses.

This percentage is crucial for management as it allows them to assess the level of risk associated with sales variability. A higher margin of safety percentage indicates a lower risk since there is a greater buffer against potential declines in sales.