Year-on-year growth is one of the most important metrics for businesses looking to review their performance over a defined period. Not only does it remove seasonality from the picture, but it also allows you to standardize your metrics and look at hard data without worrying about variable factors and tweaking the numbers. Knowing how to calculate year-over-year growth can point you toward identifying key determinants that have had an impact on your business, whether positive or negative. Moreover, looking at smaller chunks of data can sometimes be misleading.
On the other hand, year-on-year growth data allows businesses to zoom out and gain an overall understanding of how their business is doing. For businesses looking to effectively manage their finances and optimize their growth trajectory, calculating YOY growth accurately is the way to go. Read on as we discuss the importance of calculating year-over-year changes, their utility, and how to calculate YOY growth for your business.
What Is Year-Over-Year Growth?
It is an important metric that indicates a change in revenue. It is one of the key performance indicators for retail businesses and is also used by other industries to identify areas where the company is performing either positively or negatively. This is especially important to note since revenue and profitability are distinct. For example, a business might not see much growth in terms of net sales, however, it might still see an upsurge in revenue due to increased sales of high-value goods. Calculating YOY growth involves considering key parameters like the ones mentioned in the example to accurately chart the business’ performance relative to the previous year.
When calculating year-over-year changes, monthly volatility and seasonal growth & decline are not factored in. Despite having slow months toward the start of the year, businesses might be able to make up for lost sales during the remainder. This is often visible only in a YOY number, whereas monthly statistics might hint at negative growth for the months that saw slow movement. Similarly, YOY numbers can also be calculated for two sets of monthly projections from different years. This makes way for granularity and pointed metrics for businesses that might require more specific data. Businesses that capitalize on the seasonality of sales find this method of calculating YOY metrics to be especially useful. Numbers from the same quarter from different years can also be used to derive similar statistics. That being said, YOY metrics are not limited to revenue. Other aspects of your business such as average sale value, sales conversions, and reach can also be calculated using a YOY growth formula.
How to Calculate Year-Over-Year Growth
Before calculating YOY growth, it is important to outline the metric you’re looking to target with the analysis. The most common reason for undertaking a YOY analysis is to understand whether the growth of your business has been increasing or decreasing in the previous years. The values for the chosen parameters are either annual, quarterly, or monthly. A basic requirement is for the values to be at least one year apart, following which you can get started on calculating year-on-year growth.
What is the YOY Growth Formula?
Calculating YOY growth can be represented via the following formulae:
| Year-Over-Year Growth = | Current Value | – 1 |
| Prior Value |
Determining the Difference in Revenue & Nature of Growth:
Subtracting the value of the previous year from the current year’s value yields either a positive or a negative number that indicates the direction of growth.
A positive value indicates positive growth, whereas a negative value indicates negative growth.
Difference in revenue = Value from the current year – Value from the previous year
Determining the Rate of Growth:
Dividing the difference in revenue by the previous year’s value yields the growth rate.
| Growth Rate = | Difference in revenue |
| Previous year’s value |
Determining the Rate of Growth in Percentage:
Multiplying the rate of growth by hundred yields a percentage growth rate.
| Growth Rate % = | Difference in revenue | x 100 |
| Previous year’s value |
Steps in Calculating YOY Growth
The steps to derive YOY numbers can be better illustrated by an example. Let’s consider the following to illustrate YOY calculation:
A business reports $250,000 in revenue this year, whereas the previous year’s numbers indicated revenue of $180,000.
The metrics for the business can be calculated using the following steps:
1. Difference in Revenue
Value from the current year – Value from the previous year
250,000 – 180,000 = $70,000
The difference in revenue is $70,000 with the business seeing positive growth.
2. Rate of Growth
| 70,000 | = 0.388 |
| 180,000 |
3. Rate of Growth in Percentage
| 70,000 | = 0.388*100=38.8% |
| 180,000 |
YOY growth formulae can also be used in Excel to either simplify or automate the process to carry out these calculations frequently. Knowing how to find annual growth rates can be an essential exercise for small businesses and budding entrepreneurs looking to closely track their progress since their venture’s inception. Using the above steps can simplify the process.
The Benefits of Calculating YOY Growth for Small Businesses
Calculating YOY parameters for your business can be a rewarding exercise if you’re looking to outline key indices that are affecting the performance of your firm. You can harness the following benefits if you’re a small business looking to improve your numbers in the future:
Reliable Figures
Year-on-year growth statistics are more reliable than monthly figures when you’re expecting to see seasonal variations in demand and sales. Instead of merely looking at isolated values of individual months, YOY figures clump together data from the past 12 months or more.
Gives You Complete Information
Since monthly and quarterly data can fall short in the broader scheme of things, year-on-year variations can pinpoint actual growth or decline when calculated accurately. For businesses that are looking to capitalize on their thrust in the market, this is imperative. By providing you with a complete picture of your business’ performance, these figures can get you started on identifying the components of your business that work and those that don’t.
Track Financial Performance Over Defined Periods
Year-on-year statistics are balanced. They allow you to analyze your business’s financial performance relative to that of the year before. It is unaffected by disruptive factors and only yields a concrete number that streamlines the process of growth projection for business owners.
Promotes Financial Planning
Businesses that calculate and visualize their year-on-year changes are better prepared when it comes to financial planning. Definitive numbers make it easier for entrepreneurs to estimate their business needs. Apart from planning, the projections also lay down the framework for abiding by targets and the roadmap to better performance in the subsequent years.
Helps You Gain Investment
YOY growth figures are a great way to show investors that your company holds promise. Most investors looking at contributing to your business expect to see year-on-year figures alongside projections. Having concrete data in this regard can help you pull in valuable investments that can help your business expand and thrive in the market.
With an understanding of how to calculate a key metric in your business, you can now present accurate projections and draft better plans to grow your business. Apart from calculations and projections, financing is also key to a successful business. Consider obtaining legitimate financial support from trusted partners such as FundKite to ensure you run a hassle-free and profitable venture that sees lasting growth in the years to come.
