Year-Over-Year Growth Formula

Year-over-year (YoY) growth helps measure performance progression, with the formula being: (Value in Current Year − Value in Previous Year)/Value in Previous Year × 100.

In this article, we will conduct a deep dive into the YoY growth formula, its significance, particularly to small businesses, and how to correctly calculate it and interpret the results–as well as its limitations. We’ll also discuss how to apply these results in your business decisions.

Also, this guide is related to our articles on understanding and calculating EBITDA, understanding the return on assets formula, and operating income vs. net income.

This list includes:

• Year-over-year growth formula
• Year-over-year growth calculation
• Understanding year-over-year growth
• Interpreting year-over-year growth
• Applying year-over-year growth in business decisions

Let’s get started!

Calculating YoY growth

Year-over-year (YoY) growth is a statistic that highlights your company’s growth patterns from one year to the next.

Here’s the basic formula:  

(Value in Current Year − Value in Previous Year) / Value in Previous Year x 100

This formula may seem complex at first, but broken down, each part is straightforward, with its own specific role in the overall calculation. Let’s take a closer look.

Value in Current Year

Your starting point is the Value in the Current Year. This is your business’s most recent complete year’s worth of data. For instance, if you’re looking at growth from 2020 to 2021, the Value in Current Year would be the total sales, revenue, customers or whatever metric you’re tracking for 2021.

Value in Previous Year

The next part of the equation is the Value in Previous Year. Continuing with the example above, this would be the numbers from 2020. It’s important to match the metric — so if you’re looking at sales for the current year, make sure to look at sales for the previous year too.

The difference

Afterward, you’ll subtract the Value in Previous Year from the Value in Current Year. If this number is positive, that means your business grew during the time period. A negative number, on the other hand, indicates that your business contracted. It’s okay if this happens sometimes. Fluctuations are common in business, and it’s useful information to have for future decisions.

Next, you’ll divide this difference by the Value in Previous Year. This step normalizes the raw difference, taking into account the size of your business in the previous year. It’s a way to get beyond the raw numbers and understand how significant the growth or contraction is, relative to the size of your business.

Multiply by 100

Finally, multiply your result by 100. This step converts your answer into a percentage, making it easier to understand and compare. For instance, if you get a result of 0.20, that’s equal to a 20% growth rate — an impressive result for any small business.

Examples of YoY calculations

Let’s use a small boutique as an example, where metrics of interest would probably include revenue, customer base and expenses.

Revenue

Say your boutique recorded a revenue of $50,000 this year, and last year it was $45,000. You would calculate $50,000 – $45,000 to give you a difference of $5,000, (make sure the answer is a whole number). Then you divide your difference by last year’s value, $45,000. So, $5,000/$45,000 = 0.11, and then multiply 100 for 11%.

That’s an 11% increase in revenue from last year.

Customer base

Let’s look at the customer base. If this year your boutique attracted 700 customers versus 600 the year before, subtracting 600 from 700 gives you 100. Divide 100 by 600 and you get around 0.17, or 17%. That’s a solid increase in your customer base!

Expenses

Imagine this year you spent $20,000 and last year it was $18,000. The difference is $20,000 – $18,000 = $2,000. Then you divide your difference by last year’s value, $18,000. $2,000 / $18,000 is 0.11, or 11%.

Factors influencing YoY growth

Grappling with YoY growth is a constant reality when running your own business. Here are some variables that can significantly impact YoY calculations.

Changes in market conditions

Market conditions can have a profound impact on your business’s growth. For example, a rise or fall in the economy can increase or decrease the demand for your products or services. This directly affects your sales and, consequently, YoY growth, so stay alert and adaptable to fluctuating market conditions.

Internal changes

Sometimes it’s not the outside world that shakes up your business; internal changes can do that, too. Changes in business strategy can impact your growth: launching a new product, venturing into new markets, or expanding your service offerings can boost sales and revenue. But taking on a significant business overhaul or suffering from mismanagement can cause sales to plummet.

Changes in industry trends

Industry trends can also heavily influence your growth. If a new trend favors your business, you may see an increase in sales and overall growth. However, if a trend decreases interest in your product or service, you can face the opposite scenario. Keep a watchful eye on these trends so you can modify your strategies in time–whether to capitalize on these trends or mitigate their impact.

Competition

Your competitors’ activities can greatly affect your YoY growth. If a competitor is launching a new product, running aggressive promotional campaigns, or adjusting pricing strategies, any of these could impact your market share and sales, influencing your YoY growth.

Regulatory changes 

Regulatory changes in your industry may also affect your growth. New laws or regulations can either enhance or limit your business operations, impacting your growth rate.

Adjusting for anomalies and seasonality

Sometimes your calculations are going to result in data that doesn’t follow the usual pattern. These occurrences, often known as anomalies, can range from the impact of a global pandemic to a local event that boosted your sales for a brief period. Your revenue might also fluctuate depending on the season or time of the year—a phenomenon known as seasonality.

Anomalies and seasonal elements can skew your YoY calculations, giving you a distorted image of your business performance.

The good news is, you can adjust your calculations to account for these variations and get a clearer snapshot of your business growth.

Why is anomaly detection important?

Being able to spot anomalies in your data can save you from jumping to incorrect conclusions about your business progress. A sudden spike in sales might feel good, but if it’s due to a one-off event, it doesn’t necessarily mean your business is booming. Similarly, a sudden downturn could be due to temporary factors out of your control. By identifying these anomalies, you won’t let these outliers cloud your judgment and affect strategic decisions.

Statistical methods 

One way to detect anomalies is by using simple statistical methods. The average (or mean) of your sales over a certain period can give you a base to start from. Anything that deviates significantly from this average could be considered an anomaly.

However, be careful not to be too rigid with this approach. While it can help you spot extreme cases, some fluctuations in business are normal and don’t always indicate a problem or significant event.

How to adjust for seasonality

Adjusting for seasonality can be a bit more complex, especially if your business has strong seasonal patterns–like increased summer sales for a swimwear company. Here, you’ll want to look at the relative change in sales year over year for the same period.

So if your swimwear sales jump 50% from May to June, rather than being thrilled about the sudden increase, it would be more valuable to compare the June sales of the current year with the June sales from last year. This comparison will reveal a more realistic idea of business growth, if any.

Using YoY growth in business decisions

Here are some practical examples of how you can use YoY growth for better decision-making.

Comparing past performance

Do you know why your sales spiked in March and dipped in September? To figure this out, you’ll want to look at your YoY growth for a clearer view of performance trends over a more extended period, not just month to month.

For example, if you made $50,000 in March this year and $40,000 in March last year, your YoY growth rate for March would be 25%.

Assessing seasonal trends

Do holidays impact your sales? YoY growth can provide an objective measure of how much holiday seasons, festivals, or even weather changes affect your business–information you can then use in inventory management and promotional planning.

Let’s say you sell ice creams and your sales pick up during the summer months. But how much do they pick up? This is where YoY growth comes in. If your sales in July this year are twice what they were in July last year, that’s a YoY growth of 100%. And that’s valuable information for deciding how much inventory to stock up for next July.

Making operational adjustments

YoY growth can also guide operational adjustments. For instance, if your YoY growth shows a decline in a particular product line, you may want to analyze your production costs, pricing, or marketing strategy.

On the other hand, a striking increase in YoY growth for a specific service may lead you to consider expanding that area of your business. A café owner who notices a 50% YoY growth in the sale of vegan pastries might want to capitalize on this by putting more vegan options on their menu and promoting these to attract an even larger customer base.

Comparative analysis with other metrics

While YoY growth is a reliable way to gauge your business’s growth, it’s by no means the only one. Other metrics include quarter-over-quarter (QoQ) and month-over-month (MoM)–different angles from which to view your progress.

YoY provides a clear picture of growth over a relatively long period, highlighting overall trends and patterns that can inform your future strategies. However, YoY won’t help you spot short-term changes or seasonality effects on your sales or revenue. For that, you need smaller timeframes.

Quarter-over-quarter (QoQ) growth

The QoQ growth metric lets you compare one business quarter to the preceding one. In some businesses, changes can occur quickly. You introduce a new product line, you run an aggressive marketing campaign, or perhaps there’s a significant shift in the market. These scenarios will have immediate effects on your performance that YoY growth won’t capture as effectively.

By tracking your business’s QoQ growth, you can see these short-term effects and adapt accordingly. You can make quicker decisions and take immediate action to capitalize on opportunities or mitigate challenges.

Month-over-month (MoM) growth

As the name suggests, MoM compares the growth of your business from one month to the next; it’s particularly useful for new and fast-growing businesses.

In the early stages of your business, a lot can change in a month. New clients come onboard, you launch a new product, or a big marketing campaign kicks off, all of which can create rapid changes in the direction of your business. MoM growth can help you track these accurately.

Challenges and limitations of YoY growth analysis

A problem with YoY growth figures is that they tend to simplify complex data into a single percentage. This might become an issue if fluctuating factors, like prices or market share, change across the year. They wouldn’t be reflected in the YoY growth figures.

Another common pitfall is a skewed perspective. If your business had a terrible year, it’s easy for the next year to register high YoY growth numbers, just because you’re starting from a low base. Conversely, a great period of growth might be followed by seemingly slow growth, obscuring the fact that your business is still performing well.

To avoid getting an inaccurate picture, take these limitations into account. Always look under the hood of your YoY growth figures and account for seasonal changes, one-off events, business transformations, and unexpected factors. Don’t let impressive growth figures blind you from reality. Consider using additional metrics like MoM growth, or better yet, a combination of different measures.

Conclusion

Year-over-year (YoY) growth is an easy way for you to track performance and spot trends. You can apply it to any business metric, not just sales, to get an accurate and detailed insight into different aspects of your company.

You might feel overwhelmed by the numbers and calculations, but YoY growth analysis doesn’t have to be daunting. Try working it into your regular business review and planning process, and you’ll likely quickly find yourself getting comfortable with it. The information it provides will make your planning and decision making more informed, accurate, and confident, and seeing how your business is growing year by year is a clear, quick, and powerful way to understand and track its health.

Next, check out our articles on understanding net 30 payment terms, Profit First Accounting for small businesses, and how to calculate amortization with examples.

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