While you can get helpful information about your startup's performance from monthly or weekly financial metrics, there are times when you need to analyze growth over a longer period of time.
You may lack information about business sustainability, threats, and opportunities without a clear understanding of your longer-term growth trends.
By tracking your year-over-year (YoY) growth, you can see if you’re consistently growing, which areas are performing best, and what you can do to improve.
In this article, you'll learn why year-over-year growth is essential, how it differs from other financial metrics, how to calculate it, and the best tools and resources to speed up your calculations.
What Is YoY Growth, And Why Is It Important?
Year-over-year growth is a simple but powerful way to measure how your business performed compared to the same period in the previous year. It tracks growth or losses over time and helps you make more informed business decisions.
How Does YoY Growth Differ From Other Growth Metrics?
Compared to other growth metrics like quarter-over-quarter (QoQ) growth, month-over-month (MoM) growth, and compound annual growth rate (CAGR), YoY provides a comprehensive view of your business's performance and helps you plan long-term business strategies.
For example, though QoQ and MoM growth provides frequent updates on your company's performance, they are subject to seasonal fluctuations and one-time events (see below!).
QoQ and MoM metrics might show the financial impact of a particular marketing campaign you've run in the short term, while YoY growth will give you a holistic view of how your marketing affects sales.
Common Use Cases For YoY Growth In Business Analysis
Here are some of the common ways you can use YoY growth as part of your startup’s financial accounting processes:
- Track revenue growth — Compare current revenue to previous years to gauge the differences in sales over time. This can help you identify sales trends and operational strengths and weaknesses.
- Monitor customer growth — Track the average number of customers you acquire annually. Then, evaluate whether your marketing and customer growth opportunities are paying off.
- Understand market share — Understand changes in your company's market share over time and take the right steps to address them.
- Oversee employee growth — Track your workforce expansion to identify annual hiring trends and attrition rates for better human resource management.
- Observe product or service growth — Monitor the performance of specific products or services over time and take remedial action to improve sales.
- Benchmark against industry standards — Analyze how your performance compares to the rest of the market so you can make more strategic decisions to stay ahead of the competition.
Why Tracking Year-Over-Year Growth Matters
Tracking year-over-year (YoY) growth allows you to analyze and communicate important trends about your company's growth. Here are some of the main things tracking YoY helps you to do for your business.
1. Identify what works and what doesn't
YoY growth calculations help you evaluate the long-term performance of different areas of your company. It enables you to analyze long-term trends and analyze what works and what doesn't.
For example, if you notice that a specific product has dropped in sales this year compared to the previous one, you could work on improving the product features based on customer feedback.
2. Easily raise capital and secure funding
Before investing in your business, investors will want to see your year-over-year numbers. These figures help them learn whether your company has maintained consistent growth over time, is financially healthy, and can bring them a return on investment.
3. Track your business’ performance accurately, regardless of seasonal trends
Calculating YoY business performance is especially useful for seasonal businesses that experience changes in sales volumes throughout the year.
For example, an e-commerce platform for online retailers may see spikes in sales revenue during the holiday season. During this time, online sellers will likely need more features from the SaaS business, such as inventory management or customer support tools, as they get ready for high demand. Because the e-commerce business is bringing in more money during certain seasons, comparing the current month's numbers with the previous month's doesn't make sense.
Calculating YoY growth gives you a comprehensive view of your comparative performance by adjusting for monthly volatilities and seasonal variations.
4. Reduce bookkeeping errors
Your YoY growth statement helps you identify any book discrepancies or errors.
For example, a specific month's significant increase or decrease compared to the same period last year could indicate a data entry error or other anomalies. Examining the same period year after year helps you identify and eliminate bookkeeping errors.
Strategies For Improving Year-Over-Year Growth
To improve year-over-year (YoY) growth, you need a comprehensive strategy that addresses all aspects of your business, from product development to customer acquisition and retention.
Here are a few ways to bolster your YoY growth:
- Adopt a growth mindset — Embrace experimentation, innovation, and risk-taking. Encourage your team to think outside the box and develop creative solutions to drive growth.
- Focus on customer needs — Use customer feedback and data to continuously improve your products and services while providing an exceptional customer experience.
- Diversify your offerings — Develop new products or services that complement your existing offerings or expand into new markets. This can help attract new customers and create new revenue streams.
- Improve customer retention — Implement strategies to improve customer retention, such as loyalty programs or personalized communication. This can help drive sustainable growth over the long term.
- Streamline operations — Look for opportunities to automate processes or outsource non-core activities to free up resources and focus on growth.
- Invest in technology — Invest in technology to improve customer experiences, automate processes, and drive growth. For example, implementing a customer relationship management (CRM) system can help you better track customer interactions and personalize communication.
Importance Of Key Performance Indicators (KPIs) When Tracking YoY Growth
A key performance indicator (KPI) is a measurable value that helps you monitor and evaluate your business’s progress. You can use specific KPIs to track the financial performance of your entire organization, or you can focus on particular teams, departments, or employees.
For example, one important KPI to track is your burn rate or the amount of money your business loses each month. KPIs can help you identify areas of strengths and weaknesses, make data-driven decisions, and optimize performance.
Monitoring and evaluating your KPIs can also help you better understand your YoY growth. They allow you to measure your annual progress and analyze trends for important metrics such as revenue growth or customer acquisition.
By tracking KPIs related to your year-over-year growth, you can identify opportunities for long-term improvement and develop strategies to drive sustainable growth.
How To Calculate Year-Over-Year Growth Percentage
Calculating year-over-year growth is straightforward. The results are expressed as a percentage, which makes them easy to read and interpret. Follow these steps to calculate the year-over-year growth rate.
1. Determine The Area Of Your Business You're Interested In
The first step is deciding which metric to calculate the YoY growth for. You can calculate the YoY growth rate for business metrics like profit, revenue, customer acquisition, or market share.
2. Choose The Time Period
Decide on the two time periods you want to compare. For example, you might want to compare your profits from this year to your earnings from 2020.
3. Plug It Into Your YoY Growth Formula
The formula for year-over-year growth is as follows:
(Current Year Metric - Previous Year Metric) / Previous Year Metric * 100
Let's use this example to learn how to calculate revenue growth year over year. Suppose Company X had total revenue of $10 million in 2021 and $15 million in 2022. To calculate the YoY growth rate, we will compare the revenue of 2022 with that of 2021.
Here's how the calculation goes:
(YoY growth rate) = [(Revenue in 2022 - Revenue in 2021) / Revenue in 2021] x 100%
= [(15 million - 10 million) / 10 million] x 100%
This means that Company X has experienced a YoY growth rate of 50%, which indicates its revenue increased significantly in 2022 compared to the previous year.
The increase in revenue indicates that its products are in high demand, and more customers are buying from them. This means the company can invest in further growth opportunities, such as expanding its product line or entering new markets.
Interpret And Act Upon Your YoY Growth Data
Once you begin tracking YoY growth data, the next step is to apply it to improve business operations. Here's a step-by-step guide to help you take the right action:
- Analyze the growth data — Look for significant growth or decline areas, and identify the factors contributing to these changes.
- Compare to industry benchmarks — Compare your YoY growth data to industry benchmarks to see how your business is performing relative to your competitors. This can help you identify areas to improve to stay competitive.
- Set goals — Use your YoY growth data to set realistic goals for your business. Set targets for revenue growth, customer acquisition, and other key performance indicators based on your historical data.
- Invest in high-performance areas — Improve your business’s performance by investing in marketing and advertising, expanding your product or service offerings, or improving your operational efficiency to drive growth.
- Monitor progress — Monitor your progress over time to see how your actions impact your YoY growth data. Regularly reviewing your data can help you identify areas where you may need to adjust your strategy to achieve your goals.
- Evaluate — It's crucial to evaluate growth rates in context. While lower rates may appear less significant, each industry has benchmarks for satisfactory year-over-year performance.
- Adjust as needed — If your YoY growth data is not meeting your expectations, adjust your strategy. Consider trying new marketing tactics, refining your product or service offerings, or exploring new growth opportunities.
Tools And Resources For YoY Growth Analysis
Calculating your YoY growth rate is relatively simple. That said, the following business tools can further simplify the task and give you deeper insights:
- Spreadsheets — Spreadsheets like Microsoft Excel or Google Sheets are common tools for analyzing YoY growth data. You can use them to visualize charts and graphs that visualize your data, perform calculations, and track progress over time.
- Financial management software — This helps you track total revenue, expenses, and profitability over time. Some software solutions offer real-time automated daily accounting and bookkeeping capabilities, making analyzing your YoY growth data faster and more accurate.
- Customer relationship management (CRM) software — CRM software, such as Salesforce or HubSpot, can help you track customer acquisition and retention rates over time. By analyzing your annual customer data, you can identify areas where you may need to improve your sales and marketing efforts.
Leverage YoY Growth For Sustainable Business Growth
Calculating year-over-year growth is an effective method for monitoring your business's long-term performance. Though keeping track of daily operations can provide insight into your business's cash flow and other short-term metrics, analyzing annual performance generates a more complete and thorough understanding of your business's long-term potential and helps you focus on areas for improvement.
To learn more about how to track YoY growth for your startup, talk to one of our financial advisors.