Year-over-year (YoY) growth measures how well your business is doing this year compared to how well it was performing at the same time in the previous year.
Calculating YoY metrics, sometimes called “annualizing,” is one of the best ways to develop a longer-term understanding of your business’s performance. It’s different from month-over-month or quarter-over-quarter growth, which measures shorter-term changes and is more prone to seasonal or market fluctuations.
Businesses can calculate YoY growth for any important metric, such as revenue, profit, users acquired, or website traffic. You can measure virtually anything as long as you have at least 12 months of data. However, in most cases, YoY is used to measure financial performance for a specific year, quarter, or month.
By focusing on year-over-year metrics, businesses gain a clearer perspective on their long-term trends and overall growth, cutting through the noise of short-term variability.
The Year-over-Year Growth Formula
Components:
Value Current Year (Numerator Part): This is the metric you are measuring for the current year or period (e.g., revenue, profit, website traffic).
Value Last Year (Denominator Part): This is the metric value for the same period in the previous year. It's the baseline for comparison.
Difference (Value Current Year - Value Last Year): This shows how much the metric has changed between the two periods. A positive difference indicates growth, while a negative difference indicates a decline.
Expressed as a formula:
This formula works for any metric you want to measure and helps you identify how much your business has grown—or shrunk—in a specific timeframe.
Calculating YoY Growth for Different Timeframes
To begin the process of calculating year-over-year growth, you must first determine the type of growth that you wish to assess.
To evaluate the financial performance of your company, you will need to obtain a copy of the financial statements that pertain to your company, specifically the income statement and the balance sheet. Whenever you are calculating growth for a number of distinct time periods, it is highly recommended that you additionally open an Excel spreadsheet and record your results in that particular spreadsheet.
In addition to this, you will need to choose a time period for your year-over-year calculation. In the majority of instances, year-over-year growth will compare performance on a monthly or quarterly basis; however, any time period will do as long as you have data starting from the beginning of the year.
While conducting an analysis of financial metrics, it is important to ensure accuracy by consulting your income statement, balance sheet, or records of bookkeeping.
Examples of YoY Growth
Revenue Growth Example
In January, your business made $50,000, up from $40,000 in January of last year. Using the method, this number shows that your sales in January were 25% higher than the same month last year. This growth shows how much you've improved, which can help you figure out what methods helped you do well.
Website Traffic Growth Example
Let's say that 30,000 people visited your website in the first quarter of this year, up from 25,000 in the same quarter last year. This is how the math works:
Over the past year, 20% more people visited your website. This measure could mean that your website optimizations or marketing efforts are paying off.
Daily Net Income Growth Example
A restaurant earned $1,756 in net income on July 4th this year, compared to $1,288 last year. The calculation:
This shows that your restaurant’s July 4th net income grew by 36.3% YoY. This growth highlights the impact of holiday-specific strategies, such as promotions or menu changes.
Why is YoY growth important to business?
1. Accounts for Seasonality
YoY calculations remove the confusion caused by seasonal fluctuations, providing a more accurate comparison. For example:
Scenario: Because of the holidays, a store's sales usually go through the roof in the fourth quarter. If you compare December sales to November sales, you'll get a false picture. But if you look at December of this year and December of last year, you can see growth clearly without any seasonal bias.
2. Helps you see things in the long run
Year-over-year growth tells you everything you need to know about the long-term health of your business, while month-to-month measures only show short-term trends. It's easier to see problems and opportunities from this angle.
As an online store grows, it looks at its monthly profit trends to see if changes to the way it works are leading to higher margins over time.
3. It helps people choose better
If you know how your business will grow over time, you can put your money, hire people, and set more realistic goals more wisely.
How IB Bookkeeping Can Help
Correct YoY calculations begin with correct data. IB Bookkeeping then comes in quite handy. Being the biggest professional bookkeeping service available in America, we guarantee the exact meeting of your small business accounting needs. We can assist like this:
Correct Financial Documentation: Get accurate and current financial statements to make sure your YoY estimates are grounded on good data.
Expert Insights: Our monthly reconciliations and thorough financial statements will provide all the tools you need to assess performance and guide decisions.
Time Savings: Let us handle the numbers so you can focus on growing your business and serving your customers.
Tracking YoY progress becomes simple and dependable when you work with IB Bookkeeping as your trusted friend.
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