Margin of Safety
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Breakeven analysis tells you the sales level where you stop losing money. The margin of safety answers the follow-up question: how far can sales drop before you're back at breakeven?
What is the margin of safety?
It's the cushion between what a company is actually selling and the point where it would start losing money.
Worked example
Say breakeven sales are $87,500, and actual sales are $107,500:
Sales could drop by $20,000 before the company crosses back below breakeven and starts losing money.
A bigger margin of safety means more room to absorb a sales downturn before it becomes a loss. It's a quick way to gauge how exposed a company is to a drop in demand.
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More on breakeven analysis
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.