Growth is one of the most important things for the long-term survival of your business. Company growth is important because it can help manage your assets, attract new talent, and fund investments. Without sustainable growth, the company’s operations will stagnate and lower the quality standards of the products or services in the company. So, how do you measure business success over a long time scale? The answer is year over year growth formula.
YOY is a financial analysis that businesses use to gain insight into company success. YOY means comparing the financial data of a certain period with the same period in the previous year.
This analysis can see whether your business experienced positive, stagnant, or negative growth during the period. Therefore, you need to understand the benefits, formula, and importance of year-on-year for your business. Check out the explanation in the following article!
Table of Content:
Table of Content
What is YOY Growth? (Year-Over-Year)
YOY growth is a form of financial analysis that allows you to evaluate a specific period of a company’s performance. It is monitored by comparing the revenue growth rate from last year to the present.
You can apply the year-over-year growth formula that presents financial performance as a percentage, to quarterly and monthly revenue. The YOY formula effectively presents a clear matrix for the company’s growth during the fiscal year.
Yar over year growth formula can measure many aspects of your company’s growth, such as revenue, conversions, average sales value, and other matrices. Year-over-year performance can allow you to gauge whether a company’s financial performance is improving, static, or deteriorating.
For example, you can read that certain businesses reported increased revenue for the fourth quarter over the past four years. Therefore, comparing year over year is a popular and effective way to evaluate your company’s financial performance.
The Benefits of YOY Growth
You will get many great benefits when accurately calculating business growth with YOY growth. YOY can show the development of the company and the financial prospects of your business. There are the following reasons that make YOY calculations beneficial for your business:
Precise and accurate performance
Year-over-year analysis can provide more accurate information for monthly revenue growth, especially with seasonal products or services. Comparing the same month in different years allows you to draw accurate comparisons despite seasonal traits.
YOY growth also clearly and accurately shows the long-term results of your business efforts rather than using a monthly matrix. You can also use HashMicro’s most integrated ERP software to get fast and accurate company data.
Simple tracking and counting
The second benefit of year-over-year is simple data tracking and calculation. Calculate YOY offers simple calculations that you can do easily. This calculation makes it ideal for more straightforward business analysis for small businesses.
In addition, year-over-year results are also in the form of percentages that provide a clear understanding, thus providing more accessible results. Comparing a particular month with this calculation can smooth out the data and make it look more reliable for investors.
Better understanding of what improvements can be made
Another benefit of YOY is understanding the improvements your business will need. Especially your business that has operated for more than a year. The Data from YOY can help you in directing business strategies.
Furthermore, YOY presents data that allows you to see the company’s business results, as well as the improvements. For example, one of the departments in your company has underperformed, and then your focus is on improving that department.
Also read: Definition and Important Role of Human Capital in Companies
How to Calculate YOY Growth
You can calculate year-over-year growth easily because it only requires specific data collection, which is then put into a simple equation to get the results. Here are the steps you need to take:
Determine the period you want to compare
The first thing you need to do in calculating YOY growth is to determine the period you want to compare and evaluate. Choose the same timeframe, for example, the fourth quarter of 2020 and the fourth quarter of 2021. You can compare this year’s monthly data with last year’s to show the business growth to potential investors.
Retrieve company data at the specified time
The second step is to take data from the company in the period you have specified before. You can find all the data you need on your company’s business balance sheet. If unavailable, you can compare your monthly or quarterly income from their respective fiscal years. Keep in mind that you should compare the same timeframe for each period.
Calculate with the YOY formula
After determining the timeframe and collecting company data, the next step is to calculate your data using the year-over-year growth formula. Here is the formula for calculating year-over-year growth:
How to calculate year-over-year growth is to take income from the current year and subtract it from the previous year’s income. Then, divide the difference by the previous year’s income and multiply that answer by 100. The result will be expressed as a percentage that will show growth year-over-year.
Analysis and evaluation of total profits
The last step is to analyze and evaluate your company’s total profit. You can use the number from the YOY calculation to show investors that your business is growing and performing well.
You can also use the number to inform your future plans. If the number is negative, you can use it to inform improvements to help your business perform better next year.
The Importance of YOY Growth for Small Businesses
If you own a small business, you may find it more difficult to conduct an analysis that shows your business is performing well. Such reasons can be challenges and barriers to receiving investment or other financial support.
Year-on-year growth is essential for better company performance for both large and small businesses. Here are some reasons for YOY growth for small businesses:
Evaluate which one requires more funding
You can use YOY calculation to evaluate the success of your business area, such as the clothing store area in the retail industry. You can adjust which parts or products require more funds or reductions for business improvement. This calculation provides an objective view of overall performance. Thus, helping to determine the success of the products you sell.
Understanding business efficiency
Looking at the year-on-year growth of your business can help you determine how efficient the company is. For example, you can use YOY growth to measure the number of goods shipped during the same month in two years.
If it has increased significantly, then this indicates that your efficiency is improving. YOY calculations provide an opportunity to implement changes to improve the efficiency of your business compared to last year.
Negotiate materials for product price
YOY growth is very important for small businesses because you can use the calculation to negotiate product prices with vendors. Using YOY calculation can help you determine whether the product price you are paying is reasonable or not.
For example, your craft business buys paper in bulk from another company. Then you can use year-on-year growth to assess whether you sell enough paper to pay. YOY growth can help you negotiate prices with vendors so that you can pay different amounts for bulk supplies.
Also read: Efficiency of Your Company by Calculating ROA
The Importance of YOY Growth for Seasonal Businesses
If you have a seasonal business, using monthly analysis may make your company look less successful. Instead, using YOY calculations can give you a period-specific comparison. Thus, you will see how your business performs during successful seasons. Therefore, why is year-on-year growth significant for seasonal businesses?
YOY growth is important because it eliminates the seasonal effect automatically. Comparing specific months or quarters can improve your data when you use year-over-year growth. YOY growth makes it appear more reliable to investors.
For example, a retail company will probably have above-average sales in the fourth quarter due to holiday shopping. Comparing sales between the third and fourth quarters may look like company growth.
However, this increase is only seasonal. In contrast, comparing retail sales figures to the fourth quarter of last year will show how your seasonal business improved. Therefore, YOY growth is an important part of assessing seasonal business performance.
Also read: Lure Buyers Using The Right Sales Promotion Action
Conclusion
Year-over-year (YOY) Growth is a type of financial analysis that allows you to track and evaluate a company’s performance over a specific period as a business owner. The advantages of YOY calculations include clearer and more accurate performance results, simpler tracking and calculations, and a better understanding of where your business can be improved. As a result, YOY growth is critical for those of you who run small and seasonal businesses.
In calculating YOY growth, you may have difficulty retrieving the previous year’s data that you will compare quickly and in real-time. This will certainly hamper your company’s financial performance. If this happens, your company will find it difficult to evaluate its finances, so poor decision-making can lead to losses.
As a result, you will need the Best Accounting System in Singapore to make it easier to evaluate your company’s finances. Accounting software from HashMicro offers many advantages, including reduced calculation time, real-time data, and high accuracy.
Using this software will make it easier to calculate your YOY growth, which will increase the profitability of the company. Contact us immediately to get the best offer and free demo!
