Year-Over-Year (YOY) in Finance & Business
Seeing the growth of your business is exciting, isn’t it?
It’s a telltale sign that your efforts are bearing fruit.
That said, not all growth can be seen in the physical form of your business.
Instead, they are represented by numbers (e.g. financial statements, sales reports, management reports, etc.).
For example, you really can’t see the growth in your business’s revenue unless you take a look at its financial statements, particularly the income statement.
There are a lot of metrics you can use to measure the changes in your business (just take a lot at financial ratios).
But if you’re just looking to compare your 1st quarter sales of this year to that of last year’s, then you might want to know of the Year-Over-Year (YOY) analysis.
What is Year-Over-Year (YOY)?
Year-Over-Year (or simply YOY) is a metric that pits a certain value (e.g. sales, operating income, number of products sold) of a certain period of a certain year against its previous year counterpart.
The period is typically a month or quarter, though some use annual too just like comparative financial statements.
For example, you can use YOY to compare the number of products sold for January 2021 with that of January 2020.
It’s a simple but useful metric that can show you the growth (or decline) of your business in a year in percentage form.
Using YOY allows you to gauge if your business is improving, staying as is, or declining, and on top of that, by how much.
The great thing about YOY is its ease of use and versatility.
Do you want to know how much your Revenue has grown?
Or do you want to know by how much costs have increased?
What about knowing if expenses are within the expected rate of increase?
Or how about knowing if this year’s 1st quarter sales performed better than last year’s?
Performing a YOY analysis can answer all of that.
You don’t need to do complicated calculations to arrive at your answer too.
The formula for computing YOY or YOY growth is as follows:
YOY Growth = (A – B) ÷ B x 100%
A = value of a certain period of the current or most recent year or the year of your choice
B = value of a certain period of the previous year (one year before A)
For example, if you want to know the YOY growth of your Q1 revenue for 2021, A would be the Q1 revenue for 2021, while B would be the Q1 revenue for the previous year which is 2020.
Put into formula form, it should look like:
YOY Growth = (2021 Q1 Revenue – 2020 Q1 Revenue) ÷ 2020 Q1 Revenue x 100%
Let’s try assigning numbers to those values.
Let’s say that the Q1 sales for 2021 amounted to $25,000 and Q1 sales for 2020 amounted to $20,000.
With these figures, let’s compute for the YOY growth of Q1 sales:
YOY Growth = (2021 Q1 Revenue – 2020 Q1 Revenue) ÷ 2020 Q1 Revenue x 100%
YOY Growth = ($25,000 – $20,000) ÷$20,000 x 100%
YOY Growth = $5,000 ÷ $20,000 x 100%
YOY Growth = 25%
As per computation, Q1 sales grew by 25% from 2020 to 2021.
A pretty straightforward computation, don’t you think?
Who uses Year-Over-Year (YOY)
Financial analysts perform YOY analysis to assess whether there are any changes in the quantity and/or quality in certain aspects of a business.
They can use it to determine if a business is steadily growing, or if a business is minimizing costs or overspending, etc.
Investors and creditors use YOY analysis to assess whether a business is capable enough to pay them back should they lend it money (in the case of creditors) or if it can generate returns if ever they invest money (in the case of investors).
Investors can also use it to gauge the performance of a particular share.
For lenders, YOY gives them a general view of a business’s financial health.
Even economic analysts use YOY analysis when analyzing the overall economic situation of a country.
For instance, by performing YOY analysis, economic analysts can compute for GDP growth, changes in unemployment rate, growth of inflation rate, etc.
Of course, there are the internal users which include you as the business owner, your co-owners or shareholders (if there are any), the management, and the employees.
Since YOY analysis shows not only the growth but also trends in your business, you can use it to make certain decisions or enact policies to ensure the steady growth of the business.
Certain industries use it to measure things other than just financial data. For example, in the hospitality industry (e.g. hotels, motels, inns), they use YOY to assess the growth of customer traffic or the popularity of certain services.
They can then use the data to come up with promos. In the healthcare industry, they use YOY to measure the changes in the number of patients served or assess the effectiveness of introducing a new practice.
In the logistics industry, they use it to measure the efficiency of delivery, as well as the number of items delivered.
Lastly, in the manufacturing industry, they use YOY to compare the annual performance of machinery and equipment.
Is a particular piece of machinery still operating at its optimal level?
By using YOY analysis to compare the productivity of machinery to a previous year, you can see whether the machine is working at the same level or is already declining in terms of production.
Year-Over-Year (YOY) and Seasonality
We already mentioned the ease of use and versatility of YOY. But that is not the only reason why you should be using it, or rather, that’s not the only advantage YOY has over other metrics.
Perhaps the main advantage of using YOY (aside from the aforementioned ease of use and versatility) is that it minimizes, if not completely reduces, the effects of seasonality.
You notice how some businesses are more profitable during certain seasons compared to the rest of the year?
For example, let’s talk about chocolates.
While chocolates would sell any time of the year, they sell even more during February (because of Valentine’s Day), October (due to Halloween), and December (this one due to Christmas).
If you use other metrics of comparison such as Month-Over-Month (MOM) that compares a certain value on a monthly basis, then the MOM growth of January to February chocolate sales, and February to March chocolate sales would probably be way different.
There might even be a decline in chocolate sales (if we compare March to February).
By using YOY instead, you take note of the performance for the year instead of a month.
By comparing the chocolate sales for February 2021 to that of February 2020, you minimize the effects of seasonality as the two periods are expected to have higher sales than normal.
This is especially useful for businesses that offer products or services that sell well during certain seasons (e.g. tax season for accounting services, valentine’s for the businesses that sell flowers and chocolates, the winter season for stores that sell winter clothes).
Limitations of Year-Over-Year (YOY)
Just like any metric, YOY isn’t the end all be all. It has its limitations too.
Since it measures performance on a yearly basis, it tends to be ineffective in highlighting short-term growth or decline.
For instance, you might want to account for the effects of seasonality.
Since YOY minimizes the effects of seasonality, it might not be the best metric to use for that.
In such a situation, using Month-Over-Month (MOM) or Year-to-Date (YTD) would be much more effective.
Another limitation of using YOY is that it cannot account for volatility.
It cannot provide insight as to what months should be improved as it shows you a yearly performance instead.
There’s also the fact that in order to perform YOY analysis, you would need at least two figures from different years, one from each year.
That means that a business that has just started cannot use YOY as it does not have the data needed for it yet.
The business would need to be operating for at least 13 months.
Lastly, just like any other metric, you get the most out of YOY if it is used in conjunction with other metrics (such as financial ratios or YOY of other periods). YOY, on its own, is limited on what it can inform you.
For example, it would be better if you compute the YOY growth of each month or quarter and then compare them with each other.
Or that in conjunction with the YOY growth of revenue, you also look at the YOY growth of costs and compare them.
And since YOY is a percentage, you can also use it to compare with that of another business within the same industry.
Year-Over-Year and you as the business owner
There’s really no reason why you shouldn’t learn about YOY.
It’s simple and easy to understand, yet is very useful in assessing the growth of your business.
It helps you in understanding your business, its performance in different aspects, and its trends at a top level.
Not only that, some lenders would actually require you to present a YOY analysis of some important financial data (e.g. revenue, net income), so that’s another reason for you to learn about YOY.
While there is no one true standard for YOY as it varies from business to business and industry to industry, anyone would agree that having a positive YOY growth for revenue and other similar items is always for business.
As for costs and expenses, a status quo or negative YOY growth would be preferable.
Aside from giving you a baseline indicator of growth, YOY can also give you insight as to how efficient your business is in spending money, how effective it is in pricing its products or services, or how well it is performing in non-financial aspects, etc.
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Harvard Business School Online "How to Read & Understand an Income Statement" Page 1 . October 29, 2021
University of Nebrasa - Lincoln "Year-end Financial Analysis and Tax Management Strategies" Page 1 . October 29, 2021
Iowa State University "CPI and inflation: relationship between MoM and YoY values" Page 1. October 29, 2021