Timeframe: Profit (or loss) is calculated using revenue and expense accounts on the income statement from the past accounting period. Profit simply shows how much loss or income was generated during the accounting period, irrespective of break-even point. Purpose: Margin of safety shows the percentage that sales can drop before a business is operating at a loss. While the margin of safety and profit are closely related, there are a few key differences to keep in mind. ![]() Gross profit measures revenue earned after subtracting production-related costs, while net profit measures revenue earned after all costs have been deducted. However, this can be further broken down to gross profit, net profit, and operating profit, each of which looks at the equation in a slightly different way. Once you’ve determined these figures, here’s how to calculate margin of safety ratio: You’ll need to know two key figures for the margin of safety profit formula: This may or may not be worth the investment, depending on the product’s cost of production. For example, if you must sell 3,500 items to break even and your projected sales are only 3,700 items, your margin of safety is only the profit earned from 200 items. This figure can also be used to determine whether a product is worth selling. The higher your margin of safety, the bigger the cushion your business has. Another way to look at it is the distance a business is from being unprofitable. Margin of safety measures the amount above the BEP, showing revenue earned after all required expenses have been paid. A business must meet a certain threshold of sales to cover all fixed and variable costs, called the break-even point (BEP). ![]() Margin of safety, or MOS, is a measure of the difference between the break-even point and real-life sales. profit below, as well as how to use the margin of safety profit formula. We’ll cover the differences between margin of safety vs. Profit measures a business’s earnings and margin of safety measures the sales required to turn a profit. ![]() While both use revenue in their calculations, the outcome and intent of these two figures are different. In accounting, the margin of safety and profit are both important calculations to be aware of.
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