Understanding Year Over Year
As a business owner or leader in your company, you are constantly looking for ways to analyze and test the health of your organization. Different statements are vital in reading the status of your business. Year Over Years gives a great perspective on its health and helps direct you into figuring out the next step for improvement.
Why It’s Essential
Year Over Year gives you control of your business beyond the traditional calendar. For example, each business deals with seasonality. If at the end of the year, business picks up for 6 weeks during the holidays, the Year Over Year allows you to compare it to last year. You can use it to measure how well you are doing.
Another example: in June you can see how you did compared to the June last year. It’s a real-time metric that gives you solid information to act on quickly.
With the right metrics and systems in place, we can better understand our business and equip ourselves for a trajectory of growth.
What is Year Over Year?
Year Over Year is a metric that businesses use to compare measured data against another year. This could be anything but likely involves metrics like expenses, profit, revenue, EBITDA, and more. It doesn’t have to be financial, it can be anything that is important and can be measured within your company.
Business managers use this metric to get a visual picture of how their company is doing.
Imagine your business today. A lot is going on. You might have dozens of financial statements and documents and you don't even know where to start when it comes to understanding your organization. Or you are not organized yet to come up with detailed reports, and testing the health of your company is abstract and difficult.
Thankfully, Year Over Year is a simple metric that we can all use today. Instead of many statements and trying to make sense of them all (which is important but sometimes you need something simple and quick), Year Over Year gives you a snapshot of company health.
The Benefits of Year Over Year
There are many perks to using Year Over Year as a tool. Specifically, managers can assess if a company is making fewer sales by the quarter when comparing last year; or the same concept for a similar metric. It's a window into the future based on relevant past data.
Year Over Year offers quick and actionable data. Best of all, you use your own verified data. Unlike relying on industry reports and competitors for information that isn’t 100% connected to you, you have your most accurate data and representation of company health. Your own metrics give you the best picture. Year Over Year utilizes this information and helps you visualize where you are.
With a quick report, you can stay on top of the company and plan for success. When you look at information side-by-side, compared to a prior year, you can see exactly where your business falls today. By converting it to a percentage, you can plan on improving it or continuing to do what works.
How to Make a Year Over Year
By now, you have an idea of how Year Over Year works. It's a metric that compares prior years with today. But it's only a concept until you can put it into action. Let’s review some of the basic principles in developing the numbers you need and then we’ll go over some practical examples.
Here are two steps you need to do to create an effective Year Over Year analysis.
1. Make Sure Your Current Financial Process Is in Order
Do you have a financial manager or organized reporting process? If you still don't have a proper system in place, it could be hard to get accurate numbers. When you are making important decisions for your company, you want to make sure the integrity of the information you use is in order. If you don't, then you could be getting the wrong analyses and make costly mistakes.
Find the right professional and/or create a strong system to make sure your finances are in line and well-documented. Year Over Year is the fruit of healthy financial reporting.
You should also have a few years of data to work with. One year is vital, but the more years, the better and more accurate you can be. The last three years are a great range to compare your current year with. You would need to calculate it each time per year.
Are your numbness and metrics clearly defined? For example, how do you define your operating expenses, EBITDA, website conversions, and more? Make sure these metrics are accurate and everyone knows what goes into them.
Once you have the right system in place, you can get an accurate Year Over Year and make the best decisions possible.
2. Know What to Compare
When most of us think of Year Over Year, the first thing we think of is usually revenue or profit. But we're missing out on so much more. There are dozens of metrics that give us important insight into the growth of our companies; how our customers behave, what products are more popular, which upsells sell most, and more.
Identifying what you want to compare and which metrics are important are essential as you plan for long-term use of Year Over Year. If you aren’t measuring, then it’s impossible to learn and study what has worked (or hasn’t).
Metrics You Can Start Studying Today
Use Year Over Year to compare the revenue you earned during a year, quarter, or month. Maybe there is a week during the busy holidays—compare it to last year.
What are your earnings before interest, taxes, depreciation, and amortization? This is a key metric to understanding the health of your business and comparing it to previous years will be important for future planning.
All businesses are moving more online. Knowing how many visitors you received and how many took action on your site is a big determination for your future growth. Find out how customers behave when they visit you online.
Average Purchase Price Per Customer
Maybe you made more revenue. Or you have more customers. But are you better off than last year? Ideally, you want your customers to spend as much as possible per purchase. You can compare the average purchase per customer Year Over Year to determine if your customers are willing to spend more or if you have the right pricing to encourage more spending.
Sales Per Unit
Which product is selling the best? Which one could be making the most profit? Measure how every unit is doing. Identify declining sales on a particular product and detect growing potential with others.
By now you have seen the many ways we can use Year Over Year. KPIs, or key performance indicators, are the metrics unique to you and your business. What are specific metrics that are relevant to you?
How You Can Calculate Your Year Over Year
There are a couple of ways to calculate Year Over Year. We’ll use the following formula to get there.
(Current Year/Last Year) -1 = Year Over Year
This formula can be interchanged with other periods. For example, the first quarter of last year and the first quarter of this year; the first week of June last year and the first week of June this year; or last quarter vs. this quarter. The name changes to month over month, quarter over quarter, et al., but the concept is the same. Depending on the snapshot you need, you can determine the best analyses.
Now it’s time to put it into action. The best way we can experiment is by imagining one type of business. To simplify it, let’s imagine we are running a lemonade stand.
Let’s say our lemonade stand made $5,000 last year in gross profit. This year, we finished at $7,000. The equation would like this: ($7,000/$5,000)-1 = .4; this converts to 40%. The stand has made a 40% increase in gross profit this year.
Now let's look at it on a day-to-day, practical level. We can apply it to quarters. The following year we made $1,500 in the first quarter. Last year, in the same quarter, we made $1,750. We calculate it as ($1,500/$1,750)-1= -.14; which converts to -14%. That's a big drop. Next quarter, you will now work on making sure you hit the target compared to last year, and possibly make up for this loss in gross profit.
Perhaps we want to know how we are doing with website visitors. Last year, we had 12,000 visitors. This year, we had 20,000. Our Year Over Year would be (20,000/12,000)-1 = .667.
That’s a 67% increase!
What about email list subscribers? We will review the month of August. Last August, it was 200 new sign-ups. This august it was 180. We calculate it as (180/200)-1 = -.1; at a 10% decline, we have some work to do!
Year Over Year Puts You in Control
Ultimately, Year Over Year makes it possible to make any metric easy to understand and applicable with real-world improvements. It converts numbers into visualized concepts based on your day-to-day experience. By comparing to last year, and having a percentage to work with, you get an automatic picture of your company's health.
You can use this analysis to build a stronger company and plan for its future.