How to calculate year over year growth

As a leader in your company, you are constantly looking for ways to analyze and test the financial health and profitability of your business. Different statements are vital in reading the status of your business finances. Calculating year-over-year growth rates can give a great perspective on your company’s financial health, and can help you figure out the next step for improvement.

 

How to Calculate Year Over Year Growth

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What is Year-Over-Year?

Year-over-year (YOY) growth is a performance indicator that businesses use to compare measured data against the previous year. Year-over-year measures don’t have to be financial. YOY can measure any important data for your company, such as expenses, profit, revenue, EBITDA, and more.

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 through a growth percentage change (increase or decrease).

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 on the profitability of your product or service. 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 continue to do what works.

Why is YOY 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 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.

How do You Calculate Growth—Information You Should Have

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 year-over-year growth examples.

Here are two steps you need to do to create an effective year-over-year growth analysis.

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 an inaccurate year-over-year analysis and make costly mistakes.

Find the right professional and create a strong system to keep your finances 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 numbers 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.

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

Here are the crucial metrics you should start tracking today to ensure the success of your business and optimize your profits. You can use a YOY growth formula on each of these metrics and compare them to their last year’s, month’s, or quarter’s equivalent.

Revenue

Use year-over-year to compare the financial performance of your business through your revenue growth during a year, quarter, or month. Maybe there is a week during the busy holiday seasons or during the summer—especially for seasonal businesses. Compare it to last year.

EBITDA

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.

Website Traffic

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 sales growth potential with others.

Other KPIs

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 to Calculate Year-Over-Year Growth Percentage

There’s a few formulas to calculate year-over-year growth. For our year-over-year growth calculations, we’ll use the following year-over-year growth formula:

(Current Period (Year)/Last Period (Year)) -1 = Year-over-year growth (YOY)

This formula can be interchanged with other periods (such as months or quarters). 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. Depending on the snapshot you need, you can determine the best analyses.

Examples of Year-Over-Year Calculations

Now it’s time to put the YOY growth formula into action with growth calculation examples. The best way we can experiment is by imagining a company and looking at their business performance over certain time periods (months, quarters, or years).

To make the process of interpreting year-over-year growth as simple as possible, let’s imagine we are running a lemonade stand.

Year-Over-Year Example #1

Let’s say our lemonade stand made $5,000 last year in gross profit. This year, we finished at $7,000.

The equation would work like this: ($7,000/$5,000)-1 = 0.4; this converts to 40%. The stand has made a 40% increase in gross profit this year.

Year-Over-Year Example #2

Now let’s look at it on a day-to-day, practical level. We can apply this YOY analysis to quarters.

This year we made $1,500 in the fourth quarter. Last year, in the same quarter, we made $1,750.

We calculate the year-over-year as ($1,500/$1,750)-1= -0.14; 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 improve profitability margins and make up for this loss in gross profit.

Year-Over-Year Example #3

Perhaps we want to know how we are doing with website traffic. Last year, we had 12,000 visitors. This year, we had 20,000. Our year-over-year would be (20,000/12,000)-1 = 0.667.

That’s a 67% increase!

Year-Over-Year Example #4

For another example, let’s use the simple formula to calculate YOY growth rates of email list subscribers? We will review the month of August. Last August, there were 200 new sign-ups. This August there were 180.

We calculate it as (180/200)-1 = -0.1; at a 10% decline, we have some work to do!

Be in Control of Your Business with Profit Frog

Ultimately, YOY calculations are just one metric that converts abstract numbers into visualized concepts. Use them to get a clearer picture of your company’s health, build a stronger business, and plan for its future.

And, for more actionable advice on strategically navigating your small business to the most profitable outcome, Profit Frog is here to help. We allow businesses to model profitability according to different scenarios. That way, you can make sound financial decisions and take worthy risks in an ever-changing landscape. To try our software, get started here!

How to Calculate Year-Over-Year Growth FAQ

How to calculate year-over-year percentage growth in an Excel pivot table?

Here’s how to do a year-over-year growth calculation in an Excel pivot table:

  1. Create a pivot table in Excel and set it to display percentage changes
  2. Group the dates into months, quarters, or years
  3. Add the values you want to calculate for into the pivot table
  4. Choose the ‘accounting’ format with 0 decimals for number formatting
  5. Create a percentage change column by right-clicking on the second value column (should be the newer values), going to ‘show values as’, and then ‘% difference from’
  6. Select ‘previous’ as your base item
  7. And that’s it. The second column should show the percentage difference between the values in the same row.

How do you calculate YOY growth for 3 years?

You can implement the formula mentioned above to calculate YOY growth for the next three years. Simply use the growth rate number you get and cube it. For example, if the growth this year was 1.09 (109%), for the next three years, you can expect a 1.09³ (1.29), or a 129% profit increase.

How do you write YOY?

YOY growth is usually written in percentages. Since percentages are the easiest, most visually striking way to present data, year-over-years can help you picture how much your business is growing or is expected to grow in the following years.

What is a healthy year-over-year growth?

A healthy year-to-year growth rate varies depending on the industry you’re in and how established your business is. Generally, anywhere from 2% to 4% of growth per year is the gross domestic product (GDP) standard. 

What is YTD?

Year to date (YTD) is the period of time that begins on the first day of the calendar or fiscal year and ends with the current date. This measure is useful for analyzing business growth trends and comparing your company’s performance to that of its competitors.

What is the compound annual growth rate?

Compound annual growth rate (CAGR for short) is the average yearly growth rate over a period longer than one year. This measure tracks possible changes in value of a business over several years or decades.

What are the 3 functions of business finance?

The three main functions of business finance are investments and financial markets, corporate finance, and risk management. Profit Frog helps you manage risk, the most integral business finance function, through scenario planning and profitability modeling. 

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