How to Calculate Year-Over-Year Growth: Pros and Cons of YOY

Year-over-year (YOY) growth is a form of financial analysis that allows business owners to track and evaluate their performance over a specific period. This analysis is typically used to compare the revenue growth rate from the previous year to the present. Businesses can also apply the YOY growth formula, which presents financial performance as a percentage, to quarterly and monthly revenue.
YOY growth is just one of many financial metrics that a company can use to evaluate its performance and should be used in conjunction with other key performance indicators (KPIs), like a company's balance sheet and financial statements. In terms of presenting a clear and easy-to-understand metric for company growth over a fiscal year, the YOY formula is remarkably effective.

The formula for measuring YOY growth is relatively straightforward: A business owner will choose earnings from a particular period, like the fourth quarter of the previous year, and then subtract the fourth-quarter earnings from the current year from last year's number. For example:

(Current fourth-quarter earnings) - (last year’s fourth quarter earnings) = (year-over-year growth)

The difference is then divided by the previous year's earnings to arrive at a percentage figure indicating the growth rate. For example:

(Year-over-year growth) / (last year’s fourth quarter earnings sales) x 100 = (rate of growth percentage)

There are several advantages of analyzing year-over-year growth for business owners and retailers, including:

• A direction for business strategy. Understanding YOY growth can be crucial for businesses that have been in operation for more than 13 months. The data it provides can help direct business strategy. If sales figures are high but the YOY growth percentage is low, this can indicate problems in several areas, from manufacturing and production efficiency to overhead and expansion costs.
• Fast financial information for lenders. YOY growth can indicate the long-term results of your business efforts far better than monthly or quarterly metrics. This information is extremely valuable for lenders, banks, and decision-makers who want simple and straightforward statistics on your company's growth. Lenders, in particular, will want to review this information as part of the loan application process.
• Provides top-level insight for seasonal businesses. YOY growth can give a more accurate picture of seasonality—the fluctuations that generally occur during a calendar year for seasonal businesses—than month-over-month metrics. Sales growth is usually an area of volatility for such companies, but YOY can help highlight issues that can affect long-term growth. For example, a strong season in one year followed by a weaker one in the following year can indicate problems that can become negative trends if not adequately addressed.

There are only a small number of disadvantages to year-over-year growth. One disadvantage of YOY growth is that it is ineffective for highlighting short-term changes because it can’t account for volatility. Tracking annual numbers will provide a more accurate account.
Another YOY drawback is that a startup business or one with less than 13 months of operation will not benefit from it simply because there isn't a previous year with which to compare data. Monthly or quarterly metrics work better in this scenario.

You can calculate year-over-year growth by using a relatively simple formula. The following steps will help you arrive at your growth percentage:

• Determine your timeframe. You’ll need to know the period you want to evaluate before using the YOY growth formula. Choose a timeframe that reflects the same length of time—the fourth quarter in 2015 and the fourth quarter in 2016, for example.
• Collect your numbers. You can find all of the data you need on your balance sheet. If it's not available to you, add up your monthly or quarterly earnings from the respective fiscal years you're comparing. Be sure to compare the same timeframe for each period.
• Subtract and divide. Use a calculator, spreadsheet, or another analytical platform to calculate your formula's data. Take the earnings from the current year and subtract them from the previous year's earnings. Then, take the difference, divide it by the previous year's earnings, and multiply that answer by 100. The product will be expressed as a percentage, which will indicate the year-over-year growth.
• Evaluate. Though lower growth rates may not seem substantial, it's important to consider that every industry has different standards for a “good” YOY. There are numerous factors to consider: startups and new businesses usually have bigger growth in their first fiscal year. Issues like location and products also factor into growth percentage.

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