Calculating year-over-year (YOY) growth is a vital metric for understanding long-term business performance. However, if you are new to analytics, knowing how to calculate it accurately and consistently can be challenging.
This article will walk you through calculating year-over-year growth (YOY) and analyzing financial data over a longer period of time. Doing so will provide greater context when conducting monthly financial reviews and prepare you to handle any seasonality.
What is year-over-year growth?
Year-over-year (YOY) growth is a common but key performance indicator (KPI) where you look at metrics over a 12-month period compared to the previous 12 months. This data provides you with an understanding of your annual growth which can then be compared to monthly or quarterly performance.
Knowing your growth year-over-year, alongside current financial performance, strengthens your ability to make smart strategic decisions. You can set budgets based on previous performance and avoid making reactive decisions.
Just remember, this does not mean you should rely solely on yearly numbers. It should be a tool that sets you up for consistent and more insightful short-term reviews. In the face of a crisis, such as COVID-19 shutdowns or a recession, financial statements and performance from the previous year likely aren’t as helpful.
Why is year-over-year growth important for small businesses?
Calculating your year-over-year growth is very important for small businesses looking to grow every year and become more profitable. Here are a few reasons why it can help you track and maintain the financial health of your business.
1. Helps you identify what’s working and what’s not
Measuring your YOY growth percentage can shine a light on what is working and what is not. Assessing business performance based on the last 12 months compared to the previous 12 months sets a baseline of what to expect. It also helps you identify areas that are not performing as they should.
It can relate to many things, including sales, conversions, leads, traffic, ad performance, engagement, and more.
2. Convinces investors
If you can show that your business is recording significant growth, pitching ideas to investors becomes much easier. Investors are always looking for companies that are on the up but require proof of such progress based on tangible metrics.
YOY revenue and sales growth is one of the best ways to show that your company is making strong progress and is a great investment opportunity. It also provides a glimpse of what the potential revenue growth could be if they invest.
3. Showcases seasonality
Year-over-year growth can highlight how month vs. month metrics can be skewed by seasonality. For example, an eCommerce store will likely see a large spike in sales over Christmas or during Black Friday sales in November. Analyzing data over a year means everything can be looked at objectively, and seasonality spikes do not affect the integrity of your data.
4. Provides insight into your long-term performance
While you should be reviewing financials and revising your strategies on at least a monthly basis, it’s also important to do annual planning and reviews. Focusing on business performance annually means the data is much more comprehensive and provides a clear sign of whether you are going in the right direction.
The first step in this type of long-term growth analysis is to conduct YOY calculations for your core metrics. This will quickly show you the trajectory of your business over the last year and if you are poised for growth or need to make changes this next year. When looking ahead, you can also determine what numbers you need to hit to actually grow.
5. Inspires your business
You and your employees can find great motivation from your YOY metrics if you are showing obvious growth. It can inspire your team to go the extra mile to ensure the business grows even more next year. Not only that but your company’s growth can also be used for marketing, highlighting to customers that they are clients of a growing, forward-thinking organization.
What is a healthy year-over-year growth rate?
This value can vary for every business, depending on your goals and objectives. The growth rate should also be sustainable for that specific business, ensuring you can handle more customers and dedicate extra resources.
However, healthy year-over-year growth is usually between 15% – 25%, with higher growth rates threatening to overburden smaller businesses. A 15% year-over-year growth rate at minimum is a good goal to set because a business that grows at this rate will effectively double its revenue size in five years.
How do you calculate year-over-year growth?
We hope we have clearly outlined the benefits of calculating year-over-year growth and how it can be used effectively for various purposes. You are now probably interested in knowing how you can calculate YOY.
First, you will need to collect the data from the last 12 months and the previous 12 months so you can compare. The process can then be broken down into three easy stages. For this explanation, we will assume the figure that is being measured is monthly revenue.
Year-over-year growth formula
The YOY growth formula is:
Current month – the same month of the previous year / the total number from the previous 12 months x 100.
The three stages of calculating your YOY are:
- Subtract your current month’s revenue by the same measurement from 12 months before, e.g., June 2022 minus June 2021.
- Then take the difference between these two measurements and divide that by the total revenue in the last year. This will be the growth rate of the 12-month period.
- Multiply this figure by 100 to get the percentage.
To simplify this, we will provide a concrete example that could apply to an actual situation:
- June 2022 Revenue = $3,000
- June 2021 Revenue = $2,500
- Total Revenue from the last 12 months = $33,000
YOY = (3000-2500) / 33000 x 100 = 1.52%
Alternatives to calculating YOY could be month-over-month (MoM), month-to-date (MTD), and quarter-to-date (QTD).
Year-over-year growth example
We will now detail a real-world example where the year-over-year growth rate could be applied. We will focus on a logistics company and how many items were delivered, plus how efficient the deliveries were.
YOY growth can highlight whether the company is delivering items efficiently based on the volume of items and the rate of successful deliveries. If the number of failed or unsatisfactory deliveries has grown according to the YOY rate, then this shows that something needs to change if the company is to keep its clients happy.
Deliveries can be compared over the last 12 months to the 12 months prior, helping to establish whether performance has improved or dropped.
Year-over-year growth rate – conclusion
The YOY growth rate is an effective metric for measuring data over a long period, offering a much bigger picture compared to month-over-month. Using this metric, a business can identify strengths and weaknesses, appeal to investors, improve employee motivation, and avoid data being skewed by seasonality.
Check out our round-up of 17 other key business metrics you should be tracking. Looking for a better way to measure, review and manage your business metrics? Explore how LivePlan’s performance dashboard can simplify reporting and analysis for you and your team.