What is YOY growth, and how do you calculate it?
Know how your business is performing this year compared to last? You can use year-over-year growth calculations to find out.
Year-over-year (YOY) is the comparison of one period with the same period from the previous year. The period is typically a month or quarter. For example, fourth quarter of 2018 compared to fourth quarter of 2019. YOY measures your business’s performance. The year-over-year growth rate shows the percentage change from the past 12 months.
Why is YOY so important?
Investors & bankers 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 other outside person, make sure your year-over-year analysis is available. YOY calculations are particularly good for businesses that have seasonal peaks. For example, a greenhouse’s sales might peak in the spring and summer, and 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 to the same time last year. You might find out that you’re doing better than last month, but you’re actually down compared to last year. 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. Similar to using a comparative income statement, doing a year-over-year analysis might help you find errors and discrepancies in your accounting 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 the error might have happened.
Calculating year-over-year growth isn’t difficult. You can easily get results by using information on your balance sheet.
First, choose what you want to measure and the time period you want to look at. Many times, you will measure revenue. But, you can use any measurable event that repeats annually. To start the equation, you will subtract last year’s number from this year’s number. This will give you the total difference for the year. If the number is positive, this means you had a gain. If the number is negative, you had a loss. Next, divide the difference by last year’s number. This gives you the year-over-year growth rate. Finally, multiply the number by 100 to turn your result into a percentage to get the year-over-year percentage change.
The YOY growth formula is:
Year-over-year Growth = [(This Year – Last Year) / Last Year] 100
Let’s say you want to compare your revenue from July this year to July last year. You made $40,000 this July and $25,000 last July. Subtract last July’s revenue from this July’s revenue:
$40,000 – $25,000 = $15,000
Now, divide the difference by last July’s revenue to get the growth rate:
$15,000 / $25,000 = 0.6
Turn the growth rate into a %:
0.6 x 100 = 60%
Result: You had a 60% year-over-year increase in revenue.
Let’s try another example. Pretend that you want to compare unique customers from this April to last April. This April, you had 5,000 unique customers. Last April, you had 7,500 unique customers.
Subtract last April’s customers from this April’s customers:
5,000 – 7,500 = -2,500
Now, divide the difference by last April’s revenue to get the growth rate:
-2.500 / 7,500 = -0.33
Turn the growth rate into a %:
-0.33 x 100 = -33%
Result: You had a 33% year-over-year decrease in customers.
Pro-Tip: Don’t rely on YOY alone!
It’s a good idea to look at month-to-month as well to get the full picture. A few issues can arise with the YOY calculation, especially if a company experiences a period of negative growth. The resulting growth rate won’t make sense. Also, as with many other business metrics, the YOY statistic provides much more information when calculated for a few time periods to reveal trends, and doesn’t really explain enough of a company’s growth story unless used along with other metrics.
If you rely only on the YOY metric, calculated with full-year values, you may also miss problems such as abnormally low growth in one month, which gets smoothed out if using a full-year number for the calculation.
Hope you found this information valuable. Please check in with our office to schedule an appointment to find out other ways our firm can help with your business protection goals and other entity maintenance strategies.
Joseph Michael Dickerson
Board Certified Estate Planning & Probate Attorney