Margin of Safety is the difference between actual sales minus break even sales. It shows the amount by which sales revenue can fall before a loss is incurred. At breakeven point there is no profit, no loss, sales beyond the break even point represent margin of safety since any sales above the break even point will give some profit.
Size of the margin of safety is an important indicator or director of the strength of business. Larger the margin of safety states that the business is sound and even if there is a substantial fall in sales, there will be stillsome profit. If the margin of safety is small it indicates that position of the business is comparatively weak and even a small decline in the sales would adversely affect the proft the business and may result into losses.
Margin of safety can be improved by following way. By increasing the level of production, increasing the selling price, reducing the fixed cost, reducing the variable cost, substituting unprofitable product with profitable ones, increasing contribution by changing the sales mix or by dropping unprofitable products.