Every SME owner has asked the question: how much revenue can I lose before my business starts losing money?

This is exactly what the safety margin measures. It’s a simple but powerful indicator for assessing the vulnerability of your business to a revenue decline.

In times of economic uncertainty, cost pressures, or dependency on a few major clients, this indicator becomes a real management tool.

What is the margin of safety?

The safety margin represents the gap between your actual revenue and your break-even point (also called the profitability threshold).

In other words, it’s the "cushion" your business has before it enters the red zone.

How to calculate the safety margin

Here’s the formula for the safety margin:

Safety Margin = Actual Revenue – Break-even Point

It can also be expressed as a percentage:

Safety Margin (%) = (Actual Revenue – Break-even Point) / Actual Revenue × 100

Real example

A service SME generates an annual revenue of €1.2 million. Its break-even point is estimated at €960,000.

Safety margin = €1,200,000 – €960,000 = €240,000

Safety margin (%) = 240,000 / 1,200,000 × 100 = 20%

This means the business can withstand a 20% drop in revenue before entering deficit.

Why the safety margin is essential for SMEs

The safety margin is the amount of revenue you can lose before becoming unprofitable. It’s a simple but extremely powerful indicator for managing a business.

Too often overlooked, it helps make better decisions, anticipate difficulties, and engage more effectively with financial partners. For industrial SMEs in particular, it’s as much a survival tool as a growth one.

1. Anticipate crises

The safety margin allows you to evaluate your ability to withstand a shock. A rise in raw material costs, a client delaying an order, high absenteeism... all these events can weaken your profitability.

If your safety margin is below 5%, even a small disruption can push you into the red. A company with a 20% margin can afford to lose a client without jeopardizing its cash flow.

It’s not a luxury: it’s insurance against unforeseen economic or operational issues.

2. Make informed decisions

Every strategic decision impacts your fixed costs. Hiring, renting a warehouse, or launching a marketing campaign involves medium-term commitments. Without a sufficient safety margin, these decisions can destabilize your business model.

By systematically factoring in the margin in your investment choices, you ensure that the business stays in the comfort zone, even if things don’t perform as expected. It’s also a way to prioritize truly profitable projects and push back those that would put too much pressure on you.

In short, you transform the margin into a governance tool.

3. Engage with your bank or investors

Lenders are looking for signs of control and resilience. The safety margin is one of them. It reassures them about your ability to repay a loan or absorb a temporary downturn. Unlike more technical indicators, it’s easy to explain and interpret — even for non-specialists in your sector.

A high margin projects the image of a well-managed company capable of handling growth without taking excessive risks.

In a financing proposal or fundraising, it can make all the difference.

Classic causes of a low margin of safety

Understanding why your safety margin is low is the first step to strengthening it. Most vulnerabilities don’t come from the market, but from internal decisions: cost structure, business dependencies, growth rate.

Here are the most common mistakes observed in industrial SMEs — with real examples.

1. High fixed costs

Fixed costs (rent, salaries, software subscriptions, amortization...) do not vary with the level of activity. The higher they are, the higher the break-even point — and the lower the safety margin.

In other words, you need high revenue just to cover your costs. A business with €100,000 in monthly fixed costs must generate much more revenue to start making a profit.

If sales slow down, even slightly, cash flow can shrink very quickly. This is the typical case of an industrial workshop that doubled its space in anticipation of an activity increase… that never comes.

2. Dependence on one or two clients

Even with good volumes, excessive commercial dependence weakens your margin. If one client represents more than 50% of your revenue, your model is vulnerable. A late payment, a change in the client’s orders, or an outsourcing decision can destabilize the entire business.

Classic example: an aerospace subcontractor working almost exclusively for a major client, who faces difficulties when the pace slows down.

Diversifying your client base, even with small contracts, mechanically strengthens the safety margin.

3. Volume decrease without cost adjustment

A frequent mistake: keeping fixed costs as if volume remains constant. An industrial SME loses 15% of export orders but keeps its teams, raw material stock, and initial production level.

Result: the margin decreases sharply. Failing to adjust costs (even partially) in these situations can quickly lead to an operating loss.

It’s often a question of timing: the later the adjustment, the heavier the loss.

4. Poor scaling during growth

Rapid growth is also a source of fragility, especially when it’s based on overly optimistic forecasts. Hiring several employees in advance, investing in new machines, or setting up a complete ERP system before actual orders are in place... it’s taking a risk with your safety margin.

The gap between committed costs and actual revenue can suffocate the business. It’s better to grow a bit slower, but consolidating your margins at each stage.

How to improve your safety margin

A low safety margin is not a fatality. With some targeted adjustments, it can be strengthened quickly — without disrupting your entire model. The goal: make your business more resilient, more agile, and able to absorb shocks without jeopardizing profitability.

Here are three concrete levers to activate right now.

1. Lighten fixed costs

Reducing your fixed costs lowers your break-even point. This reduces the minimum revenue needed to cover your costs — and increases your safety zone.

• Outsource what can be outsourced
  Instead of internalizing some support functions (accounting, payroll, IT), consider outsourcing. This turns a fixed cost into a variable one while maintaining a good level of service.
• Renegotiate Lleases or long-term contracts
  If you're committed to several years, renegotiate the terms. A lease rearrangement or an early exit clause can reduce your monthly cash flow strain.
• Switch some expenses to variable (e.g., freelancers)
  For occasional or non-strategic needs, prioritize freelancers or contractors. You only pay when the activity is there. This reduces your exposure during lean periods.

2. Diversify revenue sources

Diversification helps balance your dependency and smooth out revenue fluctuations. It’s an excellent lever to secure your margins.

• New sales channels
  If you primarily sell directly, try alternative channels: marketplaces, distributors, specialized platforms. This opens new outlets at a lower fixed cost.
• New client segments
  Explore complementary target groups: if you work with large accounts, try SMEs. Or vice versa. This reduces commercial risk.
• Recurring products/services
  Offering subscriptions, maintenance services, or recurring services creates a predictable revenue base. This is a simple way to strengthen your stable monthly foundation.

3. Regularly track your break-even point

Improving your margin is good. Tracking it over time is better. Good management relies on up-to-date data and realistic simulations.

• Update your costs every quarter
  Salaries, rents, raw materials change. Without updates, your margin calculations quickly become outdated. Schedule a systematic quarterly review.
• Simulate revenuedeclines
  What happens if your revenue drops by 10%? Or if a major client leaves? Simulating these scenarios helps you prepare responses — and identify your weak spots.
• Calculate multiple scenarios
  Pessimistic, realistic, optimistic scenario: this simple method helps you make more rational decisions, even in uncertain times. It’s also a good tool for dialogue with your financial partners.

What if cash flow becomes tight?

Even with a solid safety margin, a cash flow gap can quickly arise:

• A client pays late
• An urgent order requires a large supplier purchase
• You invest a bit too early

In these cases, the issue isn’t overall profitability, but available cash at that moment.

Defacto: A useful tool when the safety margin isn’t enough

At Defacto, we don’t help you calculate your break-even point. But we intervene when the risk becomes real and cash flow tightens.

Our solution gives you access to short-term financing:

• In less than 30 seconds
• No guarantee required
• Based on your client or supplier invoices
• Flexible repayment (2 to 120 days)

Real example:
A construction SME needs to advance €15,000 to buy equipment for a public contract. The client will pay in 60 days. With Defacto, they finance the purchase the same day by selling the supplier invoice and repay when the client’s payment arrives.

Conclusion

The safety margin is one of the simplest and most powerful indicators for managing the financial health of an SME. It doesn’t require complex tools, but it provides a real view of the risk.

If it’s low, take action: reduce costs, diversify clients, simulate pessimistic scenarios.

And if you still face cash flow pressure, know that quick solutions, like Defacto, can help you avoid stalling your business unnecessarily.
👉 Don’t let a good business be endangered by a simple cash gap.