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Importance of Margin of Safety

Importance of Margin of Safety:

The size of margin of safety is a very important indicator of the soundness of a business. It shows how much sales may decrease before the firm will suffer a loss. If the size of margin of safety is high, chances of incurring loss by the business will be remote but if it is low, a small reduction in sales may lead to loss. The common cause of lower margin of safety is higher fixed costs. In such a businesses a high level of activity is required. A low margin of safety is a matter of concern and so the following steps may be taken to improve an unsatisfactory margin of safety:

  1. Increase the selling price
  2. Reduce the fixed or variable costs or the both.
  3. Increase the volume of output by utilizing the unutilized production capacity.
  4. Stop production of unprofitable products and concentrate on only the profitable products.

To read more about break-even analysis :http://www.accountingtools.com/margin-of-safety

 

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