According to a 2020 global survey, the rate of business failures varied between 20 and 40 percent. While these figures were affected by the pandemic, the truth remains that not every business succeeds. To thrive (or, at least, survive), understanding your business’s performance is crucial. And year-over-year (YoY) growth is a valuable metric to gauge this. YoY growth helps you analyze how different facets of your business, such as revenue or customer base, have evolved over the past 12 months.
Here’s how to calculate year-over-year growth for your business.
What is year-over-year growth?
YoY growth is an essential metric in business analysis, offering insights into a company’s annual development trends. Expressed as a percentage, it compares key performance indicators like revenue, customer acquisition, sales or website traffic from one year to another.
This straightforward, percentage-based representation helps determine whether a certain business aspect is growing, maintaining its pace or experiencing a downturn. Analysts often use this to calculate average growth rates for longer periods and identify — and forecast — trends. Additionally, when YoY growth for a specific metric does not meet expectations, it can indicate areas needing improvement, guiding you in refining your strategies and processes to foster expansion.
Read: A blueprint for success: How to create a winning business strategy
How to calculate year-over-year growth for your business
To calculate a certain metric’s YoY growth, follow these steps.
Step 1: Identify which metric you’ll compute
As mentioned, you can calculate the YoY growth of different aspects of your business. So, the first essential step is to identify the metric you want to analyze. It can be sales volume, revenue or customer base.
Step 2: Collect data
Once you know what you’ll analyze, it’s time to obtain the values of your chosen metric. Make sure to gather data for the current and corresponding periods in the previous year. For example, collect revenue data for December 2023 and December 2022.
Step 3: Apply the YoY growth formula
The formula on how to compute year-over-year growth is this: YoY growth (in percentage) = ((Value for the current period ÷ Value for the previous period) – 1) × 100.
If you want to know the YoY growth of your revenue, and you earned $1 million this December and $800,000 in December last year, then the step-by-step calculation will be as follows:
- First, divide the current period value by the prior period value: $1 million ÷ $800,000 = 1.25
- Next, subtract 1 from this result: 1.25 – 1 = 0.25
- Finally, multiply by 100 to get the percentage: 0.25 × 100 = 25 percent
Alternatively, you can use another formula: ((Value for the current period – Value for the previous period) ÷ Value for the previous period) × 100. If you use this, then this is the step-by-step calculation:
- Subtract the value for the previous period from the value for the current period: $1 million – $800,000 = $200,000
- Divide the difference by the value for the previous period: $200,000 ÷ $800,000 = 0.25
- Multiply by 100 to get the percentage: 0.25 x 100 = 25 percent.
Either formula you choose, you will arrive at the same result, which is 25 percent. This means your revenue increased by 25 percent in December this year compared to December last year.
Step 4: Analyze the YoY growth
After getting the result, it’s now time to interpret it. For instance, if your goal was to increase revenue count by 20 percent, and the YoY growth rate is 25 percent, then it means you surpassed your goal. Conversely, a negative growth rate indicates that you must improve your revenue expansion strategies.
On a broader level, you can also use it to compare how your business fared against the average industry performance. For example, if your sector had an average revenue YoY growth of 15 percent, then it means that you’re performing substantially better than the rest of the industry players.
Tips for calculating your business’s YoY growth
Now that you know how to calculate year-over-year growth for your business, it’s important to refine your approach to ensure accuracy and relevance. Check out the tips below.
- Embrace technology. Today, many modern calculation tools and software are available to make YoY growth computation more efficient. While they help simplify your analysis, you still have to ensure that the data you input is accurate.
- Select relevant metrics. When computing YoY growth, select which performance indicators you’ll measure. Several metrics are available to any business, but when calculating YoY growth, ensure that your metrics are relevant to your objectives. For a comprehensive view, analyze the YoY growth of more than one performance indicator.
- Account for external factors. Additionally, you must consider external factors such as market trends and inflation. Also, compare your figures with industry benchmarks to provide better context. In the long term, check relevant trends and correlations between your metrics to make more sound and strategic business decisions.
Final thoughts
Learning how to calculate year-over-year growth is essential in gauging your business’s performance. However, you must carefully interpret the results after computing the YoY growth of various business metrics. Contextualize it by considering industry benchmarks, market trends and other external factors.
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