Do you know how your business is performing this year compared to last? No? Calculate year-over-year growth to find out.
Having the 411 on your business’s financial health puts you in a better position for decision making. Read on to learn what is year-over-year growth, why it matters, and how to calculate it (complete with easy-to-follow examples).
What is year-over-year growth?
Year-over-year (YOY) is the comparison of one period with the same period from the previous year(s). YOY growth compares how much you’ve grown in the recent period compared to the past period(s). The period is typically a month or quarter (e.g., fourth quarter of 2020 compared to fourth quarter of 2019).
Year-over-year measures your business’s performance—in any area you can measure. You can find your YOY growth for business performance indicators such as:
The YOY growth rate is a percentage change. How much growth have you had during this year’s time period compared to last year’s? Did you have an increase or decrease in the performance area you’re analyzing?
Why does YOY growth matter?
There are a number of reasons to take YOY growth into account. Year-over-year calculations can:
Show you what’s working and what’s not Help you get investments Put seasonality in the right context Help you spot errors 1. Show you what’s working and what’s not
Your year-over-year calculations can help you measure your business’s performance. You can see if your business is growing from year to year, not just month to month. You can easily see long-term trends and if your business is improving over time.
By measuring multiple business performance areas, you can see what’s working and what’s not. If something is not working, you may need to cut expenses or make other changes to improve.
For example, your cost per acquisition year-over-year might be better for Product A but not Product B.
2. Help you get investments
Investors usually want to see your year-over-year numbers before supplying you with business capital. Your YOY growth shows them whether or not your business is a good investment for them.
Whether the investor is a family member, friend, private investor for your small business, or another outside person, make sure your year-over-year analysis is available.
3. Put seasonality in the right context
YOY calculations are particularly good for businesses with seasonal peaks. For example, a greenhouse’s sales might peak in the spring and summer while a retail business might peak in November and December.
The YOY growth rate smooths out any monthly volatility. Instead of seeing large increases and decreases between seasonal months, you can compare your current business numbers to the same time last year.
You might find out:
You’re doing better than last month but are actually down compared to last year You’re doing worse than last month but up from where you were at last year 4. Help you spot errors
Similar to using a comparative income statement, doing a year-over-year analysis might help you find errors and discrepancies in your books.
If there are big increases or decreases from last year, you might have incorrectly recorded something. Examining several time periods year-over-year can help you narrow down when you may have made the error.
How to calculate YOY growth
There are a few steps you need to take to calculate year-over-year growthContinue reading