As a business person, you need to be regularly updated about how your business is doing with time. A HubSpot study discovered that companies that consistently track their growth metrics are 2 times more likely to reach their sales goals than the ones that don't. One way to track your business growth is to compute YOY growth. This method enables you to compare your business performance now with what it was last year, and thereby spot growth areas or areas for improvement.
What Is YOY Growth?
YOY growth measures how much your business improved (or not) with data from this year and the exact same time last year. The beauty of YOY growth is it eliminates short term fluctuations caused by seasonality or market shifts which make it harder to see your progress over time.
Say you would like to compare your January sales with Jan last year. YOY growth gives you a percentage of just how much sales increased or decreased. This particular method works for almost any part of your business - whether you would like to track revenue, profit, site visitors or perhaps the amount of customers you have gained.
Why YOY Growth Is Important for Your Business
This is why computing YOY growth matters:
1. Avoids Seasonal Confusion
Several companies, such as department stores experience high sales during specific seasons, like the holidays. Your December sales compared to November comparison might paint a false growth picture because of the holiday rush. Rather, comparing December this year to December last year provides you with a far more accurate reading about how your business is doing without the seasonal confusion.
2. Tracks Long Term Progress
YOY growth gives you the bigger picture. Are you better off than last year? Are you growing steadily or do you have to modify your strategy? YOY growth maintains you focused on long-term success instead of short term gains.
3. Simple to Calculate And Understand
The best part is that YOY growth is easy to compute and interpret. By understanding how much revenue you created this particular month vs the same month last year, you can calculate your YOY growth. Plus, the result is in percent form so it is not hard to read.
How to Calculate YOY Growth?
To calculate YOY growth for your business, follow these steps:
- Find the Current Value: First determine the value of whatever you wish to measure over the present period. It might be your income, profit or even website visitors for this month, year or quarter.
- Find Last Year's Value: Then examine the exact same data for exactly the same time last year. In case you are computing revenue growth for Jan, check out your revenue for Jan of last year.
- Take Last Year's Value minus This Year's Value: Now subtract the value from previous year from this year's value. This shows you how the two years performed differently.
- Divide the Difference by Last Year's Value: Find the difference then divide that number by last year's value. This provides you with a decimal number representing just how much your business increased over the prior year.
- Divide by 100 for a Percentage: Lastly, divide that by 100 to make that decimal a percent. This is your YOY growth rate in percentage.
Example: Calculating YOY Growth
Say you want to compute the YOY growth of your revenue for March. You made USD 60,000 this year and USD 50,000 last year in March. How you'd compute YOY growth:
Subtract previous year's income because of this year's profits :
USD 60,000 - USD 50,000 = USD 10,000 (growth disparity).
Divide that difference by last year's revenue = USD 10,000 by USD 50,000 = 0.2
Multiply by 100 for the percentage: 0.2 * 100 = 20%.
And so your March YOY growth is 20%. What this means is your revenue increased 20% last year.
Why Tracking YOY Growth Helps
YOY growth can help you in several ways by tracking it regularly:
- Spotting Trends: By calculating YOY growth consistently, you will see patterns as time passes. In case your YOY growth is slowing, your marketing strategy could possibly be modified or your offerings could be enhanced. On the flip side, if you see good growth, you are on the right track.
- Better Decision Making: Seeing the way your business is growing helps you make better data driven decisions. Whether it is time in order to invest more in a particular area of your business or to alter your objectives, YOY growth gives you the data you require.
- Impressing Investors/Stakeholders: If you are searching for investment or attempting to obtain a loan, good YOY growth tells you your business is growing. YOY growth is a simple way to show investors you are moving up year after year.
Final Thoughts
Year-over-Year (YOY) growth is a highly effective yet easy tool to monitor your business development as time passes. YOY growth measures change in your business - whether it is revenue, site traffic or client acquisition. Eliminating short term fluctuations and concentrating on yearly comparisons helps you make better, much more educated choices to move your business forward.
For expert accounting and financial insights specific to your business, consult The Fino Partners today.
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