When it comes to making decisions for your business, hard data is key. Year-over-year (YoY) growth is a data point that shows how a given business metric has grown over time. When combined with other key performance indicators, YoY growth helps business owners make informed decisions, plan ahead, and appeal to potential investors.
Read on to learn more about YoY growth, including how to calculate it and why it’s important for your business.
What Is Year-Over-Year (YoY) Growth?
Year-over-year growth is a key performance indicator (KPI) that shows a business’s average yearly growth. Like month-over-month (MoM) growth, YoY growth is a percentage. For example, you might see a YoY growth of 25% from 2022 to 2023 — if that percentage repeats or increases year after year, your business is steadily growing.
YoY growth doesn’t just measure your revenue growth rate. You can calculate YoY growth for several financial metrics, including user acquisition, customer churn rate, website traffic, and more. Growth across multiple metrics is a positive sign for your business’s future and will help you attract potential investors. Conversely, slow growth or no growth can help you spot issues in your business strategies.
The Importance Of YoY Growth For Businesses
Like other KPIs, year-over-year growth contributes to a picture of your business’s overall health. It can help you make better decisions and troubleshoot problems. YoY growth is commonly used as a data point to create growth models and track gains or losses across multiple sectors.
Other KPIs you might use to monitor your business performance include:
- MoM growth
- Revenue growth rate
- Sales growth rate
- Customer acquisition and retention rates
- Customer satisfaction
- Lead conversion rate
When analyzed together, these growth values provide vital insight for business owners, leadership teams, stakeholders, and accounting professionals.
MoM Vs. YoY Growth
If you’re using MoM growth to inform your decision-making, should you calculate YoY growth, too? Yes — YoY growth provides long-term insights that MoM growth can’t account for. These indicators should be used together when analyzing a business's performance and planning for the future.
Monthly performance often changes because of short-term volatility and seasonal trends. Those factors can cause your MoM growth rates to fluctuate throughout the year. That can lead to misleading growth models. For example, a restaurant’s revenue might spike during the summer thanks to tourism and sunny weather. If the restaurant owner only analyzes MoM growth for June through August, they’ll see rapid growth, potentially leading them to over-invest in staff and inventory. Likewise, MoM rates for August through November will show a misleading drop in revenue. The restaurant’s annual growth rate accounts for seasonal changes year after year and isn’t as impacted by monthly volatility.
That doesn’t mean YoY growth is a more valuable growth indicator than MoM growth — you should analyze both values to understand how your rate of growth develops over time.
Formula For Calculating Year-Over-Year Growth
Calculating year-over-year growth isn’t complicated. However, it can be done incorrectly. Bad data like an improperly calculated growth rate can hurt a small business and lead to poor decision-making, over-investing, misleading investors, and other potentially serious issues.
That’s why it’s so important to follow the right steps and make sure you’re only using accurate data in your growth calculations. Below, we’ll walk you through the steps to calculate and analyze YoY growth rates.
The Year-Over-Year Growth Formula
There are two main formulas you can use to calculate YoY growth.
The first formula is: YoY growth = (current period value / prior period value) – 1.
The values used in this formula depend on the metric you want to calculate. If you’re calculating your revenue growth, you’ll divide the past year’s revenue by the current year’s revenue. For example: ($30 million / $25 million) – 1 = 20% growth.
You can also calculate YoY growth with this formula: YoY growth = ((current period value – last period value) / last period value) x 100.
For example, say you want to calculate the YoY growth rate for your customer acquisition. If you acquired 30,000 customers this year and 25,000 customers last year, the formula would look like this: ((30,000 – 25,000) / 25,000) x 100 = 20% growth. You can compare your most recent YoY rate and see if, in terms of revenue, your business is growing and by how much.
Step-By-Step Calculation Guide
Accurately calculating your YoY growth takes a little more effort than just plugging numbers into a formula. Again, misleading data can hurt your business, so it’s crucial to follow the right steps and always double-check your calculations.
Here’s a step-by-step guide to accurately calculating your YoY metrics.
1. Gather accurate data – The values you plug into the YoY growth formula come from your financial statements, balance sheets, monthly revenue, and other accounting documents collected throughout the year. If you don’t use accounting software to report and store your financial statements, store them in a secure cloud folder so you can access them when you need them.
2. Calculate MoM growth throughout the year – Keep track of monthly metrics throughout the year so you have a zoomed-in picture of your annual growth.
3. Calculate YoY growth – Use the formulas listed above to calculate YoY growth. Make sure you’re using values collected over the same time period, such as exactly 52 weeks’ worth of revenue.
4. Double-check your calculations – Double-check your YoY growth rates by re-calculating or using a different software program before using the results in your analysis.
5. Analyze your YoY growth – Your growth percentage is a part of a bigger picture. Detailed growth analysis looks into all aspects of your business growth and lets you create forecasts to plan for the future.
Practical Applications Of Year-Over-Year Growth
YoY growth is a practical indicator used across industries and business sectors. If you’re a startup owner, your YoY growth might not be the most important KPI — 50% growth from year zero to year one is great, but that rate doesn’t say much about the future of your business.
However, as your business grows, YoY growth becomes a valuable indicator of your business’s financial performance. Here are a few practical applications of YoY growth in your business strategies.
Analyze Revenue Growth
Your YoY revenue growth shows how your sales have grown over the years. Although revenue is not the same thing as profit, positive YoY revenue growth is a good indicator that your past investments were successful. YoY data also contributes to predictive metrics like spend forecasting and revenue forecasting.
Monitor Customer Growth
You can also use YoY growth to analyze customer acquisition and retention. These indicators are important for marketing strategies — lower customer acquisition in one year, for example, could mean that your current marketing isn’t working.
If your business prioritizes customer retention over customer acquisition, you can use a YoY growth calculation in reverse: calculate your percentage of customers lost year over year. In this case, a low percentage means strong customer retention.
Assess Market Share Changes
Larger companies use YoY growth calculations to assess their market share over time. Market share is the percent of an industry's total sales generated by one company — for example, McDonald’s Corporation holds a 25% market share of the chain restaurant industry. Analyzing your YoY market share changes provides insight into your business's performance and your competitors' performance, too.
This application might not be relevant to your startup right now, but it’s an example of how YoY growth matters for businesses of all sizes.
Evaluate Investment Performance
YoY growth is one indicator of an investment’s success or failure. When analyzing MoM growth, you might notice drops in your revenue or acquisition after spending money on a new investment. However, those drops could be due to seasonal trends and other factors. YoY growth is a more reliable indicator of how an investment impacted your business in the long term.
How To Interpret Year-Over-Year Growth
Like any KPI, YoY growth is just a number — it won’t tell you anything about your business unless you know how to use it.
Positive growth looks different for every business. Some established businesses might not be focused on growth at all, while others shoot for 15% to 20% revenue growth per year. If you’re not sure what to expect from your YoY growth, consult with a financial advisor to set realistic goals.
It’s also important to consider other performance indicators beyond YoY growth. Whether you’re calculating revenue growth, website traffic, or another metric, annual percentage growth isn’t the only measure of success. Use other data points, including MoM growth, customer satisfaction, customer retention, and revenue per client to accurately inform your decision-making.
Use Year-Over-Year Growth For Business Strategy
When calculated correctly, year-over-year growth provides valuable insight into your business’s growth. It can be used to create growth models, appeal to investors, and support your decision-making. YoY growth gives you a big-picture view of your business’s financial health without the volatility of MoM growth.
Make sure you’re using accurate data to calculate YoY growth and interpreting it alongside other key performance indicators. The right accounting software makes it easier to reduce the risk of having bad data and quickly calculate YoY growth across multiple metrics. With careful analysis and the right tools, YoY growth rates will streamline your business strategies.
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