There are several ways to track how your company is succeeding and where it needs improvement. Year-over-year growth is among the most reliable of these measures, giving business owners a broader look at the business's overall financial health. Read on to learn how to calculate year-over-year growth so you can start using it to your advantage as soon as possible.
What is year-over-year growth?
As the name suggests, year-over-year (YOY) growth is a method of measuring a business's financial performance over time. You’ll compare your business’s profits at one point in time to the same period a year prior. For example, you could compare the fourth quarter of 2021 to the fourth quarter of 2020. This provides a quantifiable measurement of your organization's success and accounts for macroeconomic shifts or seasonal dips in sales.
Additionally, the principles behind tracking year-over-year growth also work for month-over-month or quarter-over-quarter calculations. These shorter intervals could allow for even greater precision. Learn more about these methods after the YOY growth explanation below.
Year-over-year growth formula
The calculation for determining year-over-year growth is as follows:
YOY = Current Year Earnings — Last Year’s Earnings) / Last Year’s Earnings x 100%
You can usually find the figures required on your company’s yearly balance sheet. Alternatively, you can use your monthly or quarterly financial statements and add the corresponding figures to find your yearly earnings.
How to calculate YOY growth
Below are detailed instructions on how to calculate year-over-year growth followed by an example:
Step 1: Subtract your current-year earnings from last year’s earnings
First, determine your company’s revenue in the current month or quarter. Then, subtract that number from the revenue earned over the same month or quarter last year. A positive result means that your company grew, while a negative number means that you worked at a loss.
Step 2: Divide the sum from the previous year’s earnings
Take the number from step 1 and divide it by last year’s revenue. Doing so will determine the rate of growth or loss your business experienced in the last 12 months.
Step 3: Multiply by 100
Multiply the YOY growth rate by 100 to convert it into a percentage.
Example of a YOY growth calculation
Here’s an example to illustrate the year-over-year growth formula and how it can help you learn valuable information about your business.
Let’s say you own a small cleaning company. According to your balance sheet, you had $80,000 in net revenue and accounts receivable in January 2022. However, looking at the previous year's balance sheet, your cleaning company’s equivalent figure for January 2021 was $90,000. To determine if your company grew or shrank, first, you plug in the values:
(80,000 – 90,000) / 90,000 x 100%
Then you subtract the numbers in parentheses:
-10,000 / 90,000 x 100%
The above becomes:
-0.111 x 100 % = -11.1%
According to the YOY formula, your cleaning company shrank 11.1% between January 2021 and January 2022.
Why is YOY important for small businesses?
Tracking YOY growth can help you get a better understanding of your business’s financial changes over time. Additionally, it demonstrates to stockholders or potential investors that your company is in good health. Below are some reasons why YOY growth matters for your small business.
Eliminates seasonality from your growth metrics
Depending on the type of business you run, the holiday season can often give a false impression of significant growth within that time period. Year-over-year growth accounts for sharp upticks in revenue during these periods and provides a baseline comparison for your recent successes.
Helps you better understand your business from the top down
There are many perspectives to consider when looking at the success of a business, and a broader view is often best. Year-over-year growth gives you that sort of top-level understanding. It can be a great foundation for pinpointing financial inefficiencies. Additionally, your top-level view can help prove financial stability to lenders or other parties interested in your financials.
Determines your productivity
YOY growth can help you analyze the impact of new expansions or locations on the success of your business. It measures the amount of new revenue your company’s new additions generate over time. That, in turn, can help you see whether your added cash flow is covering your extra costs.
Gives a sense of your company’s financial health
Determining your company’s year-over-year growth can give you an easy measure of your business performance over time, which can help attract investors. Additionally, the YOY calculation is versatile enough to measure variables that aren’t revenue. That includes conversion rates, customer retention, and other metrics you’d like to track over time.
YOY growth and qualifying for a loan
Year-over-year growth provides a clear, simple measure of your company’s success over time. While other financial metrics can help provide more context, year-over-year growth’s broader perspective can help you pinpoint inefficiencies. In fact, banks and other financial institutions often make year-over-year growth a key part of qualifying for a business loan. High YOY figures can generally make it easier to get approved.
Check to see if you pre-qualify* for an SBA loan, bank term loan, or other financing from a bank in the SmartBiz® network.
*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.