The safety margin refers to the financial gap between current or expected business performance and a critical threshold beyond which losses occur.
It shows how much turnover, profits or a company’s value can fall before a company falls below the break-even point or an investment becomes unprofitable. The larger the margin of safety, the better a company can cope with unexpected developments.
In business planning, the safety margin is often calculated on the basis of the break-even point:
Safety margin = actual or projected turnover – break-even turnover
The percentage calculation is as follows:
Safety margin as a percentage = (Turnover – Break-even turnover) ÷ Turnover × 100
One example:
| Key figure | Amount |
| Projected turnover | 500.000 € |
| Break-even turnover | 400.000 € |
| Safety margin | 100.000 € |
| Safety margin as a percentage | 20 % |
In this example, turnover could fall by 20 per cent before the company breaks even.
A safety margin can help businesses and start-ups in this regard:
- to identify financial risks at an early stage
- to draw up more realistic sales and cost forecasts
- to allow for possible market fluctuations
- Assess investment decisions more carefully
- to estimate capital requirements more accurately
- Preparing for unexpected developments
The term is also used when valuing investments. Investors compare the estimated intrinsic value of a company with the purchase price. If the purchase price is significantly below the estimated value of the company, there is a margin of safety.
Typical factors that can reduce a safety margin include:
- falling turnover
- rising staff or material costs
- Delays in market entry
- overly optimistic financial planning
- unexpectedly high customer acquisition costs
- the loss of key customers
- additional funding requirements
A large safety margin provides greater financial flexibility. However, it is no guarantee that a company will remain profitable in the long term. The calculation is based on assumptions that may change as a result of market shifts, new competitors or unexpected costs.
A common mistake is to base financial planning solely on the expected best-case scenario. Founders should therefore also consider realistic and pessimistic scenarios and regularly assess the extent to which changes affect liquidity, runway and profitability.
innoWerft helps start-up founders to critically review their financial plans and business models, calculate various scenarios, and assess financial risks and capital requirements at an early stage.