As your company changes and grows, numbers can show precisely how much your business has expanded, where it has grown the fastest, and the revenue growth rate. It can also show you where you can go and how to plan to get there. But how can you learn and apply this vital information?
These are just a few points the year-over-year (YoY) growth formula addresses, especially if your company encounters seasonality or changes in the sales cycle that make it challenging to compute growth from one quarter to the next. The YoY Growth of your company will give you a better, more appropriate context about your business's financial performance. In the following sections, we will discuss what YoY Growth is, how to calculate it, and examples to help you through it.
What is Year-Over-Year Growth?
As the name suggests, Year-Over-Year (YOY) growth is a key performance indicator that compares an increase during one period (often a month) to the same time twelve months earlier in the previous year. Year-over-year (YOY) growth measures a business's long-term financial development. You and your investors can compare two indicators over a specific period using the year-over-year growth formula, such as annual, quarterly, or monthly sales.
YOY provides a view of your performance devoid of seasonal influences, monthly volatility, and other factors, in contrast to solitary monthly measurements. Over time, you gain a deeper understanding of your achievements and difficulties. This is a crucial measure for retail analytics, as is to be expected. Additionally, YOY growth's formula lessens the impact of seasonal business changes and gives you a comprehensive understanding of whether your short-term objectives result in long-term success.
Year-Over-Year Growth is easy to calculate, making it a useful metric as the year concludes. You can view the overall situation as a specific percentage point. In this manner, you may quickly determine whether your small business had a successful fiscal year and whether you are well-positioned for the upcoming one.
How to calculate Year-Over-Year Growth?
A company's Year-Over-Year Growth compares how well it is doing this year to how well it was doing at the same point last year. For example, you could compare Q2 2021 to Q2 2022 because they have the same period length. This is the same as a month-over-month or week-over-week calculation—the methods are the same, but the period is longer.
But how do you calculate it? First, you must choose the type of growth you wish to measure before you compute YoY growth. Then, gather the data you'll need: your monthly statistics for the period you're looking at and the comparable data recorded a year earlier. Get your company's financial statements, including your income and balance sheet, if you're measuring financial performance. Open an Excel spreadsheet and enter your results if calculating growth over several different time frames.
Additionally, you need to choose a period for your YoY computation. YoY growth often compares quarterly or monthly results, but any period will work if you have at least a full year's worth of data.
Year-Over-Year Growth Formula
Once you have all the information, you have to follow this formula:
(Current Year Earnings — Last Year's Earnings) / Last Year's Earnings x 100
It's important to mention that you only need to look at your balance sheet to discover the figures to enter into the year-over-year growth formula. If you don't have one, add up all your monthly or quarterly earnings from a single calendar year or fiscal year. You will get an accurate result if you compare the same length of time from each period.
Year-Over-Year Growth calculation example
Let's use a real-world example to show you what the YOY growth looks like. Imagine your monthly revenues for January 2022 were $2,500, and for January 2021, they were $2000. What is your YOY Growth? The formula looks like this:
(2500-2000) / 2000 x 100 = 25%
Your final percentage growth rate is 25%; what a number! A growth rate of 25% would demonstrate your company's consistent, gradual growth. Although seasonal variations may exist, your business in this scenario is expanding overall.
What, then, do you do with this knowledge? Several things. For instance, you can change your business plan to accelerate your growth rate.
Calculating your Year-Over-Year Growth gives you a high-level view of your company's financial performance. This information can assist you in making profitable decisions. It will also make your company more appealing to potential investors, who can help you grow further. You can incorporate additional KPIs and metrics into your analysis process to generate data-driven insights and action steps for your business.
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Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.