To make the best decisions for your business, you need to understand where you are financially, what areas of your products and services have grown, and where changes might be necessary. Having the right financial information in place can assist you in analyzing your business and crafting budgets that support future growth and expansion. But how can you determine whether you are actually growing or if your business is stagnating?
Year-over-year growth is one of the measures available as you analyze your financial data to determine growth, identify areas where expenses might have grown, and more. Let’s dive into what it means, some of the benefits, and how you can use it effectively.
What is Year Over Year Growth?
Year-over-year growth, or YOY growth, is a way of measuring how a financial metric changes over two comparable periods, usually the current and previous year. For instance, if a company had revenue of $50 million in 2023 and $40 million in 2022, then the YOY growth rate of revenue would be 25%. The formula would be ($50 million/$40 million) – 1 = 25%. This means the company’s revenue increased by 25% from 2022 to 2023. YOY growth is useful for analyzing the performance of a company, an industry, or an economy over time and eliminating the effects of seasonality.
Another example would be when a company says its revenue increased for the third quarter, on a YOY basis, for the last three years. Observing YOY performance allows for gauging if a company’s financial performance is improving, static, or worsening.
What Are the Benefits of YoY Growth?
YOY measurements facilitate the cross-comparison of sets of data, thus providing a clear picture of where your company is financially. For a company’s first-quarter revenue using YOY data, an analyst can compare years of first-quarter revenue data and quickly ascertain whether a company’s revenue is increasing or decreasing. Investors like to examine YOY performance to see how performance changes over time.
As a business owner, you can use YOY growth to determine where you might need to invest more capital and energy to facilitate expansion or to determine whether parts of your business need to be changed or eliminated.
What is YoY Used For?
YOY is used to make comparisons between one time period and another that is one year earlier, thus allowing for an annualized comparison. It is commonly used to compare a company’s growth in profits or revenue, and can be used to describe yearly changes in an economy’s money supply, gross domestic product (GDP), and other economic measurements.
How To Calculate Year Over Year Growth
YOY calculations are usually expressed in percentages by taking the current year’s value, dividing it by the prior year’s value, and then subtracting one. The result will be a percentage that shows how much growth or lack of growth occurred. To get an accurate calculation, you need to compare similar time periods, such as the third quarter of 2023 with the third quarter of 2022.
What’s the Difference Between YoY and Year to Date (YTD)?
While YTD looks at a change from the beginning of the year, YOY looks at a 12-month change. YTD essentially provides a running total, while YOY provides a point of comparison for your business.
You can use this to see if changes being made are impacting the business in a positive or negative way from one year to the next.
Why is Year-over-Year Growth Important for Small Businesses?
The truth is your business faces a lot of different challenges. Understanding where demand is increasing and where it might be flagging can help you to direct your resources effectively. You can also use it to see if the changes you made have positively or negatively impacted your business revenue. The growth or lack of growth becomes a measurement of your efforts, allowing you to continue to adapt or make changes to achieve greater success with your business. Keep in mind, that different factors outside of your control can play a part in your YOY growth.
What is a Healthy Year-over-Year Growth Rate?
There is no universal answer to what constitutes a good year-over-year growth rate, as it is specific to each and every entity, depending on many factors, including goals, business type, product mix, industry, market, competition, and economic environment. Most economists generally peg good economic growth in the 2% to 4% range of GDP, with the historical average around 2.5% annually. In most cases, an ideal growth rate for a company will be around 15% and 25% annually.
How Can I Improve My YoY Growth Rate?
Unlike standalone quarterly/monthly/weekly metrics, YOY gives you a clear picture of performance without seasonal effects or monthly volatility. The impact of other factors can also be mitigated, so you can see the true picture of your business and its financial growth.
Here are some strategies to help you improve your YOY growth.
- Setting clear and specific objectives aligning with your overall business goals.
- Gathering accurate and consistent data to measure and analyze your YOY growth.
- Increasing your customer retention and loyalty by providing value and satisfaction.
- Expanding your customer base by reaching new markets and segments.
- Optimizing your pricing strategy and offering incentives or discounts.
- Reducing costs and expenses by increasing efficiency and productivity.
Clearly, there are many strategies that can be implemented and your YOY growth rate can help you to see which ones are working effectively and which ones might still need to be adjusted.
Frequently Asked Questions
What’s the significance of expressing YoY growth as a percentage?
By comparing percentages, the rate at which a company has grown, as well as any cyclical patterns, can be identified.
Can I calculate YoY growth for non-financial metrics?
Yes, you can calculate YOY growth for non-financial metrics, such as customer satisfaction, employee retention, and website traffic. YOY growth measures the rate of change in a metric across two comparable periods, usually expressed as a percentage.
Is YoY growth the same Compound Annual Growth Rate (CAGR)?
No, YOY growth and CAGR are not the same. YOY growth is the percentage of change in a variable from one year to the next. CAGR is the average annual growth rate that an investment would need to achieve to grow from its initial value to its final value over a given period of time. CAGR takes into account the compounding effect of returns, while YoY growth does not.
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In Summary
Understanding how your business is growing is key to making decisions regarding capital investments, budgets, staff recruitment, and much more. In analyzing your growth, YOY growth calculations allow you to see the percentage of change from one period to another, thus identifying what might be impacting your growth and whether your business needs to make adjustments.
You can also use it with non-financial metrics to determine what areas of your business might need to change or where you might need to revise certain processes to increase overall efficiency.
In the end, using this metric as part of your financial analysis can give you another perspective to help you identify other areas where growth is possible but also allow you to remove seasonality or other factors to create a true apples-to-apples comparison.
