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How to Calculate Year-over-Year Growth in Business

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Year-over-year (YoY) growth is a critical financial metric that measures the rate of growth from one period to the same period in the previous year. This comparison helps you to understand the business's performance in terms of sales, revenue growth, profit, or any other financial metric over time, adjusting for seasonal variations and highlighting trends.

As a small business, you want to understand this calculation for several reasons. In this article, we give you the reasons for its importance and provide a practical example of how it works. We also discuss the limitations of only using this calculation and encourage our small business readers to consider outsourcing their bookkeeping and financial data management to an accounting firm like Hall Accounting Company.

We have the systems in place to provide you with these key performance indicators in a way that will make sense to you, so you won’t have to spend time figuring out how this should work. If this is all you need, schedule an initial consultation with us right now.

Why you should be interested in learning about YoY growth

Expert explaining year-over-year growth metrics on a tablet to colleagues

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The financial health of your business is more than sales figures and current cash flow - although those are very important too. You want to know how your business is doing over time, and if you’re a seasonal business, you want to know that your income is stable year-over-year during certain periods.

Once you spot trends with YoY metrics, you can plan better. Recent financial performance may be relevant for gauging the effect of short-term decisions, but eventually, you’ll need something more substantial to explain your business's financial health, especially if you want to engage with investors or financial institutions.

Understanding the patterns in YoY growth can help you make informed decisions about where to allocate resources, whether to expand or scale down operations and how to adjust pricing or marketing strategies. It can also aid in setting realistic goals based on historical performance.

Regularly monitoring YoY growth lets you quickly identify areas needing improvement or adjustment. If YoY growth is declining, your business might need to reassess its cost structure, product offerings, or customer engagement strategies.

We think you get the point. So, let’s move on to the next step which is the calculation.

YoY growth formula

Expert analyzing year-over-year financial performance trends on a computer monitor

YOY growth calculations involve a straightforward formula that is essential for analyzing financial performance over time. Here's a step-by-step breakdown:

  1. Identify the Variables:
    • Current Period Value: This is the figure for the metric you are analyzing (e.g., revenue, user acquisition) for the current year.

    • Prior Period Value: This represents the same metric but for the previous year.

  2. Apply the Formula:
    • The basic formula for calculating YoY growth is: [YoY Growth = ((Current Period Value – Last Period Value) / Last Period Value) x 100].

    • Alternatively, it can be expressed as: [YoY Growth= [Current Year Value/Previous Year Value] - 1], which is then multiplied by 100 to convert the result into a percentage.

  3. Example Calculation:
    • If a company's revenue grew from $25 million in the previous year to $30 million in the current year, the YoY growth would be calculated as follows: [YoY Growth (%) = ($30 million ÷ $25 million) – 1 = 20.0%].

This formula to calculate yoy growth is universally applicable whether you're evaluating revenue growth, user acquisition rates, or any other metric indicative of business growth. Remember, the outcome is usually expressed as a growth percentage, offering a clear, comparative insight into year-over-year performance enhancements or declines.

Now we’ll take a look at a simple, practical example of a small online retail store that uses the YoY growth calculation to monitor financial health during certain seasons.

Practical Example: Revenue Growth Rate

Expert presenting a practical example of year-over-year revenue growth rate

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Comparing the yearly growth

A YoY growth rate is particularly helpful for seasonal businesses. Let’s consider a small online retail business that sells costumes for events (including Christmas, New Year, Easter, and other holidays).

The business has been operational for several years and has seen various changes in its revenue due to factors like market demand, competition, and marketing efforts.

The goal is to calculate the YoY revenue growth rate from 2022 to 2023 to understand how the business's sales performance has evolved.

Yearly Revenue Figures:

2022 Revenue: $120,000

2023 Revenue: $150,000

These figures represent the total sales revenue the business earned in each respective year. Let’s go through the calculations step-by-step.

Identify the Revenues: Start with identifying the revenues for the two consecutive years you are comparing. For our scenario:

Previous year (2022) revenue: $120,000

Current year (2023) revenue: $150,000

Calculate the Difference in Revenue: Subtract the previous year's revenue from the current year's revenue to find the increase or decrease in revenue.

  • Revenue Increase = Current Year Revenue - Previous Year Revenue

  • Revenue Increase = $150,000 - $120,000 = $30,000

  • Calculate the YoY Growth Rate: Divide the revenue increase by the previous year's revenue, then multiply by 100 to get the percentage.

YoY Growth Rate = (Revenue Increase / Previous Year Revenue) × 100

YoY Growth Rate = ($30,000 / $120,000) × 100 = 25%

Comparing growth rates during a particular season

We will now focus on the revenue figures for March across five consecutive years to calculate and analyze the YoY growth rates for this month, which might help in understanding seasonal trends or the impact of specific marketing strategies.

Here are the hypothetical March revenue figures for the business from Year 1 to Year 5:

  • Year 1 Revenue (March): $12,000

  • Year 2 Revenue (March): $15,000

  • Year 3 Revenue (March): $18,000

  • Year 4 Revenue (March): $17,500

  • Year 5 Revenue (March): $22,000

To calculate the YoY growth rate for each March from Year 2 to Year 5, we use the formula:

Let's calculate it for each year:

  • From Year 1 to Year 2:
    • YoY Growth=(15,000−12,000)×100%=25%

  • From Year 2 to Year 3:
    • YoY Growth=(18,000−15,000)×100%=20%

  • From Year 3 to Year 4:
    • YoY Growth=(17,500−18,000)×100%=−2.78%

  • From Year 4 to Year 5:
    • YoY Growth=(22,000−17,500)×100%=25.71%

The business performed steadily in the same month during 4 of the 5 consecutive years with growth figures between 20 - 25%. However, noticeably in March of year 4, a serious challenge impacted growth. If this small online store only looked at sales figures, they would assume they had a slight drop in sales. However, in reality, their YoY growth for that period was way off.

Limitations of YoY growth

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Of course, there is much to be gained from coming to grips with a company’s growth figures. But there are also challenges to using this information correctly and to make sound business decisions.

Let’s examine three of these limitations.

The impact of short-term business changes

It fails to account for business strategy changes, such as market expansions or pivots, which can significantly impact growth rates.

It may give an incomplete financial picture

An exclusive focus on YOY growth may not fully reflect the health of a business if other key performance indicators (KPIs), like profitability or customer satisfaction, are on the decline. Also, for startups or businesses with less than 13 months of operation, YOY growth calculations may not be applicable or provide meaningful insights due to the lack of historical data.

Data management challenges

The process of calculating YOY growth requires the collection and analysis of data from multiple periods, which can be both time-consuming and resource-intensive. To gain a comprehensive understanding of a company's financial health, YOY growth should be analyzed in conjunction with other financial analysis methods and metrics. This approach ensures a more complete financial story and yields more valuable insights.

Why you should outsource financial data management to an accounting firm

We’ve been discussing growth examples, comparable periods, and monthly performance. We’ve also been clear that multiple metrics are a better way of understanding the financial health of your business.

To get to this point, however, you need a pretty solid accounting system in place. You’ve probably heard the saying used by IT people, “Garbage in, garbage out”. It’s the same with financial data.

To illustrate, you wouldn’t decide to spend your life’s savings on buying a house that doesn’t have a foundation. You want to know that it's going to be standing for a long time. It's the same with trying to work out metrics such as YoY growth from unreliable and inconsistent data because you haven’t been keeping up with your monthly bookkeeping tasks - there isn’t a solid foundation to support your calculations.

When you outsource your bookkeeping to an accounting firm like Hall Accounting Company your monthly bookkeeping tasks will be fully taken care of, and we’ll provide you with financial reports when you need them. We will take care of the numbers and calculate all the metrics. Regular meetings will be held to discuss findings, trends, projections, cash flow strategies, and forecasts.

We will remove all the obstacles for you and partner with you to make relevant and timely business decisions. If you want to discuss how this can work for you. Give us a call.

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Further reading:

Why you should outsource bookkeeping as an SBO
Accounting for startups - building a strong business foundation
Setting up a great chart of accounts template - small business