YOY (year-over-year) is a way to compare the financial statistics of a certain period to those from the same period of the year before. Most of the time, companies calculate YOY on a quarterly or monthly basis. It helps them see whether their business had positive, stagnant, or negative growth during that time.
There are also several other ways to analyze data, such as YTD (year-to-date) or MTD (month-to-date). Each one is suitable for different situations.
For example, the key difference between YOY and YTD is that YTD helps calculate growth from the beginning of the year, calendar or fiscal, until the present date. On the other hand, YOY calculations can start from a specific date. They also compare the numbers with those from the year earlier.
As already mentioned, YOY as a measuring technique will showcase and compare two events on a yearly basis. For most businesses, that means using YOY to compare their revenue growth. YOY can be positive, negative or zero and it's expressed in percentages.
Calculating your YOY growth is very easy. Just follow these steps:
- Subtract last year’s earnings from this year’s
- Take the number you get and then divide it by the last year’s earnings
- Multiply the result by 100 to get your growth in percentages
If you prefer looking at the formula, it looks like this:
|[(This year – Last year) / Last year] x 100|
Although there are other ways of calculating growth, YOY has many advantages, and sometimes it’s necessary. If you want to take a small business loan, you’ll need to show your YOY growth statistics to the lenders. They won't be able to approve a loan before seeing how stable your business is first. That's why YOY is so beneficial.
Besides that, YOY is the best way to learn how your business is performing. Although some months are better and the profits vary, YOY sees the whole picture, including seasonal fluctuations.
MOM (month-over-month) statistics are usually not a realistic representation of any company’s performance. The businesses that have peak seasons can show huge losses in MOM or even quarterly comparisons. But, comparing your business to the same time last year will show you all the important information. It lets you know what things you should keep up with and helps point out the mistakes you should stop making.
YOY is very simple to track and calculate. With the help of Excel or tools such as Tableu, you’ll be able to follow the YOY values easily.
There aren’t many cons to YOY, but there are situations when a different method makes more sense. If you’re looking to discover short-term changes only, you don't need YOY. Rely on the current year's numbers only.
Also, YOY is not the right solution for new businesses as they can't look at the previous year's statistics. Until your company makes progress, you can rely on MOM or QOQ (quarter-over-quarter) techniques.
Now that we have uncovered the pros and cons of YOY, you might wonder - what is good YOY growth? Well, you won’t find one universally accepted answer, because it doesn’t exist. It depends on the type of business, the market, and also your goals.
Startups and new companies will have a bigger growth rate than those that are already quite profitable. There are no other general rules. Each industry has its own standards when it comes to growth rate so it's difficult to compare. In some it’s 2%, in others 30% and they’re both considered average or good.
The YOY approach lets businesses analyze their long-term performance without seasonal variations affecting it. The monthly and quarterly fluctuations can be drastic, but when you take the last year’s data into account, you get the whole picture. This can be of great use as some businesses have certain periods when they bloom.
For example, winter clothes and Christmas decorations are both bought at the same time each year. If you only look at monthly or quarterly statistics, it will seem like your business isn’t doing well. But that’s not the case. That makes YOY a good measuring technique for a situation like this one.
During evaluation, investors will typically look at the YOY change in financial metrics. Some of them, such as liquidity and operating cash flow, are best followed through the YOY method, so the investors can determine how stable the business is. This information is valuable because it showcases trends in financial metrics. Also, it helps investors evaluate seasonal or cyclical businesses more objectively.
Economic indicators help experts track market changes and even economies of countries. Some of the most important ones are the GDP (gross domestic product), employment indicators, and CPI (consumer price index). When dealing with them, it’s best to analyze the data using the YOY approach. It gives the most precise predictions and that's why investors often rely on using this method.
The YOY approach is essential in many different industries. It’s not only useful in retail, but also various other fields. Here are some of the prominent ones:
Logistics: Delivery and shipping companies also keep track of their yearly numbers. They’re usually interested in the number of delivered items and individual deliveries. The YOY method allows them to improve certain factors and boost their efficiency. One of them is the possible route change so that packages arrive faster.
Hospitality: Coffee shop chains, hotels, and restaurants all want to track the number of new objects. For example, Starbucks is one of them. Their 2019 YOY report shows they’ve added 216 new locations in the US and closed 47 in the UK. This is an important statistic that shows their yearly growth.
Healthcare: One of the most important industries in the world also uses the YOY method. By using YOY, healthcare brands can focus on patient care but also other areas like tracking their expenses. So, if they introduce new technologies, they can see how well they function. If not, it helps show where they should make changes. This improves the quality of healthcare for both workers and patients.
First, create a Pivot Table. Add the necessary data. That’s usually the amount of profit and the period - the month or the quarter. Right-click any time period, select Group, and choose Year. Then, by right-clicking one of the amount columns, choose Show Values As and % Difference From. In the Base Item field select (previous).
If you’re a visual learner, here’s a video that outlines the whole process;
An alternative to Excel could be Tableau. You only need the Excel spreadsheet with the revenue records through the quarters or months. And here’s how you can calculate YOY growth in Tableau;
Create a graph that has “Quarters” on columns and “Sales” on rows. Then, right-click on “Sales”, choose “Add table calculation” and select the following: “Percent Difference From” and “Table (across)”. To save a copy, drag the “Sales” down to Measures. The next step is naming the calculation, clicking Edit, and changing the offset to -4 so that you could see quarterly comparisons. That’s it!
The team behind Tableau made a great video that explains the specific steps. Check it out below;
There’s a couple of alternatives to YOY. The most popular among them are month-over-month, year-to-date, and quarter-over-quarter.
MOM (month-over-month) growth shows the change of a certain metric compared to its value in the previous month. YTD (year-to-date) is different from YOY because it shows growth from the beginning of the year until the present day. Lastly, if you want to compare the difference between two consecutive quarters of the same year you can use QOQ (quarter-over-quarter).
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