What Is Year-Over-Year Growth?
Year-over-year (YOY) growth evaluates a company’s financial progress over time. With the year-over-year growth formula, you and your investors can compare two metrics within a given time period, such as revenue over a yearly, quarterly, or monthly basis.
Every small business owner wants to know how their business is doing over time. Some might look to monthly profit and loss statements, others quarterly statements. To really see how your business is doing, few metrics beat year-over-year growth as a dependable benchmark to track your company’s progress.
Don’t get us wrong—other calculations are great for tracking your company’s health and progress, too. A year-over-year growth projection, however, gives you a top-level look at whether your company’s beating last year’s performance. This helps make seasonal business fluctuations look less dire, and gives you broad insights into whether or not your short-term goals are leading to long-term success.
That said, year-over-year growth is a simple metric to calculate, which makes it a great tool to have in your arsenal as the year draws to a close. You’ll be able to look at the big picture as a simple percentage point. This way, you can know at a glance if you had a good financial year and whether you’re going into the next year strong.
Year-Over-Year Growth Definition
In short, year-over-year growth comparisons pit one period against the same period from the year prior. For example, you’d compare Q3 in 2019 against Q3 in 2020, as they share the same period length. This is the same as a month-over-month or a week-over-week calculation—the methods remain the same, but the amount of time under consideration is longer.
Thankfully, year-over-year growth is one of the easier figures to calculate in business finance. Here’s how to do it.
Year-Over-Year Growth Formula
Below is the exact formula you’ll use to calculate year-over-year growth. We’ll walk you through an example below.
(Current Year Earnings — Last Year’s Earnings) / Last Year’s Earnings x 100
To find the numbers to plug into the year-over-year growth formula, you just have to look at your balance sheet.
You can check out your yearly balance sheet for a quick reference, but if you don’t have a yearly balance sheet handy, take your monthly or quarterly earnings and tally each of them up from throughout a single calendar or fiscal year. Be sure that you compare the same amount of time from each period—otherwise, you won’t arrive at an accurate figure.
How to Calculate Year-Over-Year Growth
Using the formula above, determining your year-over-year growth is fairly simple. All you need to do is subtract your current year earnings by last year’s earnings, then divide by last year’s earnings. Then, you multiply the resulting figure by 100, which provides you with a percentage figure.
Typically, business owners use year-over-year growth to compare their revenue from one period to another, but know that you can use the year-to-year growth formula to compare almost any figure. Also, you can use the year-over-year growth formula to calculate your performance over a year, month, or quarter.
Year-Over-Year Growth Example
Let’s say that you’re in your early stages with a new company and want to see how things are progressing. You’ve noticed some seasonal patterns during your first two years in operation, and you’re concerned that these fluctuations might demonstrate overarching problems in terms of your company’s financial health. You’re not sure, however, if this is actually the case—so this is where year-over-year growth can help you understand the big picture.
As an example, if your company brought in $145,000 in 2018 and $150,000 in 2019, then in this scenario your year-over-year growth percentage would be just over 3%.
Here’s what the year-over-year growth calculation would look like:
$150,000 (Current Year) — $145,000 (Last Year) = $5,000 (Year-Over-Year Growth in Cash)
$5,000 (Year-Over-Year Growth in Cash) / $145,000 (Last Year) x 100 = 3.44%
This growth rate shows that your business is making slow, steady progress. You might have seasonal fluctuations, but on the whole, your company is still growing.
So, what do you do with this information? First, you can tweak your business strategy to increase your growth rate. Or, if you’re looking for financing, you can approach lenders with this quick stat, which demonstrates how well you’re doing over the long term.
Why Is Year-Over-Year Growth Important for Small Businesses?
Overall, there are two major reasons why you’d want to know your company’s YOY growth:
- To better understand your business at a top level
- To provide would-be lenders with a sense of your company’s overall health
This growth statistic demonstrates to lenders that your company’s in good financial health—almost as a thumbnail sketch of whether or not you’re likely to have continued success.
Therefore, most (if not all) lenders will want to see your year-over-year growth stats as part of the loan application process. You might have to submit this number alongside others within your loan application, such as your cash flow, debt-to-earnings ratio, and other helpful financial stats about your enterprise.
The benefits of calculating your year-over-year growth go way beyond giving you a baseline indicator of success, however. Most companies can use this calculation as a starting point to discover inefficiencies in how they spend money, price discrepancies, or logistical issues that might be eating into revenue over time.
Here are a few of the many additional insights that a year-over-year growth calculation can provide:
Say you’ve opened up a second location for your business within the last year, and you want to determine if it’s been a success so far. Your year-over-year growth will help you determine if you’ve brought in more money as a result of the second shop, or if the costs associated with expansion haven’t been covered by the extra revenue that your new location provides.
A drop in growth can help tip you off to any potential financial problems due to the expansion since it’ll give you a clear assessment of how well your company did in comparison to the year before.
If you’ve seen an increase in sales from last year, but your YOY growth percentage hasn’t jumped as high as you expected, you may have an issue with your company’s efficiency.
Perhaps the higher sales figure has made it harder for you to manufacture goods as quickly, which means you have longer lead times before you can fulfill orders. Or, alternatively, your robust sales growth has taken its toll on your manufacturing equipment, which has slowed down the production process. An unexpectedly low year-over-year growth percentage may help you see if this additional work hasn’t translated into financial success.
Overhead is a tricky issue for most small businesses. The cost of goods sold may not decrease, even if you’re making more money and moving more inventory.
On the other hand, you might not be getting the best price possible for your materials if you haven’t renegotiated your bulk pricing with vendors. If your year-over-year growth percentage is unexpectedly low, you might want to investigate whether there are overhead costs you can cut in order to maximize your profits.
An Important Consideration for Seasonal Businesses
As we briefly mentioned earlier, your company’s year-over-year growth figure is particularly important if you operate a seasonal business. You might see that certain months or quarters are higher or lower in terms of profit, which can be disheartening.
The year-over-year growth figure helps you even out these fluctuations since it factors in existing seasonality concerns when providing you with a bigger-picture financial view.
It’s important to bear in mind any seasonal fluctuations in their own right, however. Any time you can avoid seasonal cycles—be they dry spells or loss-leading months around the holidays—do so. Make sure that your seasonal cycles still match up against one another in terms of revenue, as a smaller peak one year versus another could point toward bigger issues. In other words, don’t neglect smaller trends just because your year-over-year growth looks robust.
In this case, make sure to calculate month-over-month growth, as well. You can do so with a similar formula as year-over-year growth, except you’ll compare one month against the month prior, rather than two year-long periods. You’ll determine what kind of seasonal patterns exist, and how you might be able to anticipate or better manage your cash flow in the future.
The Bottom Line
In the big, wide world of business finances, there are enough tricky formulas and calculations to keep track of. Thankfully, however, some of the numbers you’ll need to know are easy. Year-over-year growth is one of them.
By simply determining two years’ worth of revenue, subtracting the difference, and dividing it by the earlier year’s total revenue, you have a handy accounting metric that’ll enable you to track your overall success—and give you the ability to quickly show business lenders how well you’re doing.