Wajiha Danish | October 19 2023
Regardless of the specific market or industry you’re in, maintaining steady progress is crucial for your business’s ongoing success. This is where the concept of year-over-year (YoY) growth comes into play. YoY growth is a useful tool for tracking your ongoing progress and ensuring that your business is heading in the right direction.
But what exactly is year-over-year growth? Let’s explore YoY and see how you can use this important metric to benefit your business.
Year-over-year growth is a key performance indicator (KPI) that allows you to assess and compare your progress with the same 12-month period from the previous year. YoY growth can be applied to various metrics such as revenue, leads, conversions, or any other areas your organization aims to enhance over time.
With YoY analysis, you examine the growth data for two specific timeframes from consecutive years to determine whether the metric has increased, decreased, or remained unchanged. Typically, data from a financial year, month, or quarter is compared to the same period from the previous year. This comparison enables decision-makers to establish a baseline and conduct precise analysis without the influence of seasonal fluctuations.
Using the right year-over-year growth chart not only helps you visualize significant YoY trends but also allows everyone in the organization to make quick comparisons with a simple glance.
As demonstrated in the example below, you can calculate profit rate percentages between two fiscal years and identify monthly high and low points, as well as comparison points. This approach enables you to pinpoint months where the YoY performance fell short of expectations and delve deeper into the reasons behind it.
Year-Over-Year (YoY) analysis is a valuable tool because it helps you assess your long-term growth without being affected by seasonal ups and downs. It involves studying patterns over specific timeframes, comparing one year to the next, and allows you to gain a consistent understanding of your company’s performance.
For instance, consider the retail industry. Sales tend to increase significantly leading up to the holiday season. If you only examine month-to-month or quarter-to-quarter data towards the end of the year, it may falsely appear that your business is doing exceptionally well. However, comparing the fourth quarter of the current year to the fourth quarter of the previous year provides a more accurate and actionable perspective.
By conducting Year-Over-Year analysis, you equip yourself with the necessary tools and business insights to spot real declines in progress or performance and take strategic steps to get back on the right track.
Now that you have grasped the concept of YoY trends analysis, let’s dive deep into how to calculate YoY growth. The following method allows you to efficiently and confidently track your ongoing progress.
The core formula for Year-Over-Year (YoY) growth is:
YoY Growth = (Current Year Value ÷ Previous Year Value) – 1
Let’s illustrate this formula with an example:
Suppose your company’s profits increased from $10 million in year two to $15 million in year three. Using the formula, the YoY revenue growth would be 50%.
Another way to calculate YoY growth is with this formula:
YoY Growth = (Current Year Value – Previous Year Value) ÷ Previous Year Value
Using this formula yields the same result. In this case, subtracting $10 million from $15 million gives you $5 million, which, when divided by the previous year’s value of $10 million, also equals 50%.
Here are some practical steps to calculate year-over-year growth for your business metrics:
– First, pick a specific year-over-year timeframe and stick to it.
– Make sure the two periods you’re comparing are similar (Oct-Nov), even if they don’t cover a whole financial year.
– For instance, you can calculate year-over-year growth for Q4 2020 and Q4 2021 as long as they match each other.
– Gather all the necessary numerical data to accurately determine your year-over-year growth percentage.
– Usually, you can find this data in your company’s balance sheet or database.
– Ensure that the data is from the same time period and source for comparable analysis.
– Use a year-over-year growth calculator or even a standard calculator.
– Divide the value for the chosen time period in the current year by the value for the same period in the previous year.
– Subtract 1 from the result to find your annual growth percentage.
– If you can visualize your growth rates, you can delve deeper into the data and identify trends or fluctuations.
– This allows you to gain a better understanding of your progress and performance.
– You can also compare your growth rates to industry standards and investigate periods of loss or growth.
– With this information, you can develop strategies to address any issues impeding your growth and accelerate your business’s progress.
Understanding how to compare Year-Over-Year (YoY) growth is crucial for your business strategy. There are a few common situations where utilizing YoY growth can benefit your organization.
Let’s take a look at three practical scenarios where this is highlighted:
If you want to assess how well your company is doing compared to industry norms, calculating YoY growth within your market research dashboard can be quite valuable. By considering the YoY growth benchmark for your industry and calculating your own YoY growth figure over a specific period, you can determine your position in the market in terms of relative progress. This information will guide your strategic decisions for future growth.
Another important use of YoY growth calculations is when you want to gauge your competitors’ performance. If you can access public revenue data for your competitors’ financial performance during the years or periods you’re interested in, you can compare your success against theirs. This insight allows you to identify trends related to your competitors’ product launches or seasonal campaigns, offering inspiration for your own business strategy.
Consider the scenario where you’re planning to refresh your marketing campaigns and communications. You can calculate your YoY growth to visually analyze trends or patterns over a specific timeframe. This empowers you to pinpoint the peaks and troughs in your performance cycles. If you notice a decline in profits during a specific time period in your calculations, you can start investigating the reasons behind the dips, brainstorm campaign ideas (possibly based on seasonal themes or trends) to boost engagement and enhance your future YoY growth rates.
To ensure a consistent level of success for your business, monitoring and measuring Year-Over-Year (YoY) growth is essential. Keeping track of your YoY growth enables you to establish precise benchmarks to work towards and provides valuable insights for strategic decision-making.
Leveraging modern data analysis tools is the way to go, to maximize the benefits of your YoY numbers. Data-driven visualizations and KPIs offer a comprehensive view of your operations, and they provide real-time calculations based on your input parameters. This ensures your business is guided and driven in the right direction.
Also Read: How To Calculate Manufacturing Overhead Costs
Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry. She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances.
