What is Margin of Safety in Business

When it is about the level of profitability of the business it always relates to the applied business model. However, it is worth to say that regardless of the current outcomes one of the most important things is a used formula of success. In other words, business should be not only profitable, but stable and safe, because immediate profit obtained by very risky activity sooner or later will become the reason for bankruptcy. So, any business person must calculate how to reduce possible pitfalls and obstacles caused by margin drawdown or that is even more important to apply only a model that can stand certain slumps during a company’s activity.

Actually, an answer on a question about what is meant by margin of safety in business it is possible to say that the stability of the firm can fully depend on the used margin model because this is a gap which the existing budget of an enterprise can cover in not very pleasant for the company situations on the market.

Explanation

Margin of safety is an unspoken option in a bargain where an individual can purchase something at a price that significantly lower than a potential cost thus creating certain gap where losses can become real only if a series of negative factors will continuously have an impact on the circumstances that contribute to further falling of the price of the purchase. This space between point of losses and paid price is called margin of safety and such definition is applicable to any situation where market price, actual price, and distance between the lowest possible cost of the item determine the profitability of the bargain. Any business that based on a model of very strong margin safety will:

• stable;
• highly profitable;
• adaptable.

It is more rational to avoid low margin safety deals instead of entering them.