Margin of safety
The gap between actual activity and the break-even point, expressed as a percentage of activity. It measures the fall in activity a company can absorb before tipping into loss.
What it changes for the executive
Two companies showing the same profit do not run the same risk, and no accounting document says so. The margin of safety is what the income statement lacks to say whether a bad quarter, a departing client or a delayed project is an absorbable hazard or a threat. Below ten per cent, the company is exposed to an ordinary hazard; between ten and twenty-five, it absorbs a bad year without emergency decisions; above thirty, the question becomes how to use the available capacity.
Example
An engineering firm with a ten per cent margin of safety and a trading company with a twenty-six per cent margin can show the same profit. The second withstands the same bad month two and a half times better.
A term that is missing?
Describe the situation in a few lines; the reply is personal.