Year-over-year growth calculations provide an annualized view of your businesses performance that eliminates that variability, making them an invaluable tool for:
- Benchmarking financial performance
- Putting hard numbers to key performance indicators (KPIs)
- Calculating a company’s growth
Here we’ll go over how exactly you should calculate year-over-year growth, why it’s so important for business owners to do so, and why year-over-year calculations are indispensable in a startup owner’s toolbox.
What is year-over-year growth?
Year over year growth measures how well your business is doing this year compared to how well you were performing at the same time in the previous year.
Calculating YoY metrics is sometimes called “annualizing,” and it’s one of the best ways to develop a longer-term understanding of your business’s performance.
It’s different from month-over-month growth, which measures how well you’re doing this month compared to the previous month, or quarter-over-quarter growth, which measures how well you’re doing this quarter compared to last quarter.
Businesses can (and often will) calculate the year over year growth rate for any important business metric.
You can do YoY calculations for revenue, profit, users acquired, website traffic—you name it. What you measure with the YoY growth formula is up to you, so long as you have data reaching back at least 12 months.
However, in most cases, Year-Over-Year is used to measure financial performance for a particular year, quarter, or month.
How do you calculate it?
To calculate YoY growth, first, you have to decide what kind of growth you want to measure.
If you’re measuring financial performance, you’ll want to get ahold of your business’s financial statements—i.e., your income statement and balance sheet. If you’re calculating growth for several different time periods, you’ll probably also want to open an Excel spreadsheet and record your results there.
You’ll also want to decide a timeframe for your YoY calculation. In most cases, YoY growth will compare monthly or quarterly performance, but any time period will do so long as you have at least a full year’s worth of data.
The year-over-year growth formula
To calculate the year-over-year growth of any metric, do the following:
- For any particular period, subtract the value of that metric last year from the value of that metric in the current time period.
- Divide the result by last year’s number.
- Multiply by 100 to get the growth percentage.
Expressed in equation form, YoY growth is:
Year-over-year Growth = ((Value Current Year – Value Last Year) / Value Last Year) x 100
How Bench can help
As America’s largest professional bookkeeping service, Bench has your small business accounting and bookkeeping needs covered. Once you sign up with Bench, your dedicated bookkeeping expert reconciles your books and prepares monthly financial statements, providing you with the accurate information you need to calculate growth and make better business decisions.
If you have any questions about your reports, you can message your bookkeeper or set up a call for a more in-depth discussion. When you outsource your bookkeeping to the experts at Bench, you’ve got more time to focus on what really matters—growing your business. Bookkeeping works better with Bench.
YoY growth examples
Let’s say your company wants to calculate its year-over-year revenue growth for the month of January. We’ll also assume that the business earned $50,000 in revenue this January while it earned $40,000 in the same month last year.
If we input those values into the formula we mentioned above, we get:
Year-over-year growth = (($50,000 – $40,000) / $40,000) X 100
Year-over-year growth = ($10,000/$40,000) X 100
Year-over-year growth = 25%
According to our calculations, your company grew its monthly revenue by 25% year-over-year.
Website traffic growth
What if, instead of revenue, you wanted to calculate year over year growth for a non-financial metric like website traffic? And what if, instead of comparing monthly metrics, you wanted to compare quarterly performance instead?
Although the numbers you plug in would change, the formula wouldn’t.
For example, let’s say that in Q1, your website got 30,000 page views, while in the same period last year, it got 25,000 page views.
Year-over-year Growth = ((30,000 – 25,000) / 25,000) X 100
Year-over-year Growth = (5,000 / 25,000) X 100
Year-over-year Growth = 20%
According to our calculations, your company grew quarterly website traffic 20% year-over-year.
Daily net income growth
Finally, let’s say we wanted to compare daily figures, specifically daily net income for July the 4th, which is a day that your business (a restaurant) typically experiences an enormous once-a-year boost in sales.
In your first year in business, this busy day made it extremely difficult to benchmark or compare your performance because July the 4th was such an outlier. However, with a year of data under your belt, you can calculate an annualized growth rate for July the 4th.
Let’s say you earned $1,756 net income this July the 4th and $1,288 on the same day last year.
Year-over-year Growth = ((1,756 – 1,288) / 1,288) x 100
Year-over-year Growth = (468/1288) x 100
Year-over-year Growth = 36.3%
According to our calculations, your business grew its July the 4th income 36.3% year-over-year. Well done!
Why is year-over-year growth important to small businesses?
It accounts for seasonality
The main reason businesses will calculate the YoY growth rate of any particular metric is to measure long-term business performance while accounting for seasonal fluctuations or market volatility that are outside the company’s control.
Some businesses experience peak and low seasons, so comparing month-to-month or quarter-to-quarter metrics might not be helpful.
For example, many retail businesses experience substantial sales growth during the fourth quarter because of the holiday season. While this is certainly nice to experience as a business, comparing revenue from that quarter to revenue in other quarters that year might give us a misleading picture of that company’s growth.
Comparing this December’s revenue to last year’s December revenue, on the other hand, removes seasonal fluctuations from the equation and gives us an annualized, more accurate picture of growth.
With YoY calculations, you can be confident that the percentage changes you’re calculating are accurate, unbiased, and reflective of your company’s actual financial health.
It gives you a long-term view of performance
In addition to removing variables that are outside of your business’ control, YoY calculations are a great way of keeping tabs on long-term business performance.
While keeping track of daily revenue will give you some idea of how your business is doing, annualizing a company’s performance simply provides a fuller, more comprehensive understanding of where your business stands and where it might improve.
Ready to dig deeper into your financial statements?
If calculating year-over-year growth has you wondering about other insights hiding in your financial statements, check out the rest of the Bench blog!
Below, we’ve gathered a few resources you might be interested in exploring further—because at Bench, we believe that understanding your finances should be three things: simple, effortless, and affordable.