Making decisions for your business needs good information. One important number is Year-Over-Year Growth. This number shows how much a part of your business has grown or shrunk compared to last year. By looking at YoY growth with other key numbers, business owners can make smart choices, plan well, and get interest from investors.
What is Year-Over-Year Growth?
Year-over-year growth is a KPI that measures a business’s average yearly growth. It is expressed as a percentage, similar to month-over-month (MoM) growth. For example, if your business grew by 25% from 2022 to 2023, that is your YoY growth. This growth metric can apply to various aspects of your business, such as revenue, customer acquisition, customer churn rate, and website traffic. Positive growth in multiple areas signals a healthy business, while slow or no growth can highlight issues in your strategy.
Why is YoY Growth Important?
Year-over-year growth helps you understand your business’s overall health like other KPIs. It aids in better decision-making and problem-solving. YoY growth is often used to create growth models and track progress across different areas of your business.
- Other vital KPIs include:
- EBITDA
- MoM growth
- Revenue growth rate
- Sales growth rate
- Customer acquisition and retention rates
- Customer satisfaction
- Lead conversion rate
Analyzing these KPIs together provides valuable insights for business owners, leadership teams, stakeholders, and accountants.
MoM vs. YoY Growth
Using both MoM and YoY growth is essential. MoM growth offers short-term insights but can fluctuate due to seasonal trends and short-term changes. For example, a restaurant may see higher revenue in summer due to increased tourism. Based on these seasonal spikes, relying solely on MoM growth might lead to over-investing. Conversely, YoY growth accounts for these seasonal variations, providing a more stable long-term perspective.
How to Calculate YoY Growth
Calculating YoY growth is straightforward but requires accuracy. Correct calculations can lead to better decisions and potential business problems. Here’s how to calculate yoy growth correctly:
The Year-Over-Year Growth Formula To Calculate Yoy Growth
There are two main formulas to calculate yoy growth:
YoY growth = (current period value / prior period value) – 1
For example, if last year’s revenue was $25 million and this year’s is $30 million: ($30 million / $25 million) – 1 = 20% growth.
YoY growth = ((current period value – prior period value) / prior period value) x 100
For example, if you acquired 30,000 customers this year and 25,000 last year: ((30,000 – 25,000) / 25,000) x 100 = 20% growth.
Step-by-Step Guide to Calculating YoY Growth
Accurately calculating your YoY growth involves more than just plugging numbers into a formula. Follow these steps for precise calculations:
- Gather Accurate Data: Use financial statements, balance sheets, and other accounting documents. Store documents in a secure cloud folder if you don’t use accounting software.
- Track MoM Growth: Monitor monthly metrics for a detailed view of your annual growth.
- Calculate YoY Growth: Use the yoy growth formula above to determine your growth. Ensure you’re using data from the same periods each year.
- Double-check your Calculations: Verify your calculations to avoid errors.
- Analyze Your Growth: Look at your YoY growth as part of a bigger picture, considering all aspects of your business growth.
Practical Uses of YoY Growth Formula
yoy growth formula is helpful across various industries and business stages. Here are some practical applications:
Revenue Growth
YoY revenue growth shows how your sales have increased over the years. Positive revenue growth indicates successful past investments and helps forecast future revenue and expenses.
Customer Growth
You can measure customer acquisition and retention with YoY growth. A decline in customer acquisition may indicate ineffective marketing, while strong retention rates highlight customer loyalty.
Market Share
Larger companies evaluate their market share over time using YoY growth. Understanding market share changes provides insights into their performance and that of their competitors.
Investment Performance
YoY growth helps assess the long-term success of investments. While MoM growth might show short-term fluctuations, YoY growth offers a clearer picture of an investment’s impact over time.
How to Interpret YoY Growth
YoY growth alone won’t tell you everything about your business. It’s important to understand what positive growth looks like for your situation. Consult a financial advisor to set realistic goals and consider other KPIs alongside YoY growth for a comprehensive view.
Using YoY Growth for Business Strategy
When calculated correctly, the year-over-year growth formula provides valuable insights for planning and decision-making. Ensure you use accurate data and interpret your growth with other KPIs. Using reliable accounting software can simplify the process and improve the accuracy of your YoY growth calculations.
Following these guidelines, you can use YoY growth to enhance your business strategies and drive long-term success. But if you can’t calculate accurately, contact us for expert accounting services. AquiferCFO accountants are professionals having years of experience. Contact us at https://aquifercfo.com/
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