If you own a small business, you know how important it is to keep track of your metrics. Without them, you have no idea how your business is doing and where you can make adjustments to increase profits.
One of the most talked-about metrics is year-over-year (YOY) growth. You can calculate it with a fairly simple formula, and the results are incredibly important when your business is looking for financing and investors.
We’ll explain the year-over-year growth formula, the steps for calculating it, and how you can use a year-over-year growth formula to understand your business better.
Why Calculate YOY Growth?
Before you even begin calculating YOY growth, you’ll want to pull out your profit and loss statements. These will include your revenue and expenses; when the latter is subtracted from the former, you get your profits (or lack thereof).
Look over these numbers carefully. If your profit numbers aren’t accurate, your year-over-year growth numbers won’t be either. Now assuming that’s all good, what can you do with this information?
Great Information for Lenders and Investors
Year-over-year growth numbers are critical for getting financing and investors. Lenders and investors want to see that your business is successful, that you’re going to pay back your loans, or that they’ll get a high rate of ROI. Good YOY growth is an excellent way to show off your business’s creditworthiness.
Helps Evaluate Overhead Costs
Sales could be through the roof, but after running the numbers, you notice year-over-year growth is lackluster. How could that be? Maybe your overhead costs are rising just as quickly as your sales or perhaps there are some extraneous expenses you could trim. You’ll never notice these things if you’re not calculating year-over-year growth.
Gives Insight on Seasonal Trends
You can calculate YOY growth at any time, not just at the end of the fiscal year. Calculate growth for every quarter or even every month, and you’ll start to see some interesting trends. Maybe costs always go up during the summer, limiting your growth. Conversely, maybe you make over 50% of your sales in one very busy month. Your year-over-year growth numbers help you to understand these patterns.
YOY Growth Formula
Year-over-year growth sounds like the kind of dry and complicated formula that an accountant would utilize (and they do), but it’s actually very simple to understand. Essentially, you’re looking at how much your earnings have increased as a percentage of last year’s earnings.
YOY Growth = (Current Year’s Earnings – Last Year’s Earnings) / Last Year’s Earnings x 100
Calculating year-over-year growth with this formula shows the percentage of change from last year to this year. See, it’s actually pretty simple.
Determine the Timeframe
The year-over-year growth rate formula, by definition, is looking at how your business has grown over one year. However, different time periods within that year can give you very different results. For instance, retailers typically make the most sales in the last couple of months of the year, as customers do their holiday shopping.
To get an accurate picture of what’s happening with the business, retailers should compare their revenue just after this high volume period. Depending on how specific you want to get, this could be comparing the last quarters of the years or even the last months.
Collect the Data
Gather up the spreadsheets — you’re about to do some calculations! If you haven’t done so already, you’ll want to add up your revenue and subtract your expenses to get monthly and quarterly earnings.
Subtract Then Divide
Remember that simple formula we mentioned earlier? Subtract last year’s earnings from this year’s earnings to see the change in earnings during the past year. Then divide that change by last year’s earnings and multiply by 100 to transform that change in earnings into a percentage change compared to last year’s earnings –– also known as your year-over-year growth.
Consider the Results
Now that you’ve utilized the YOY revenue growth formula, what can you do with that information? That all depends on the kind of business you’re running. If you’re a startup, YOY growth won’t be that helpful, you don’t have enough data to see any useful patterns.
For just about everyone else though, YOY growth is a marker for how well your business is doing. Growth rates vary by sector, but you can compare your growth to similar publicly traded companies to see how you stack up. If growth is slower than expected, look for ways to increase revenue or cut costs where appropriate.
YOY Growth Formula Example
Let’s follow through with some real-life numbers. In the first quarter of 2020, Apple reported $55,950,000,000 in revenue. One year later, in the first quarter of 2021, they reported $65,610,000,000 in revenue. Let’s see what their YOY growth was between Q1 2020 and Q1 2021.
(65,610,000,000 – 55,950,000,000) / 55,950,000,000 x 100 = 17.26%
That’s some fairly impressive growth for just one year!
If you want to see that kind of growth in your business, there’s a good chance you’ll need some financing for expansion. LendThrive can help by providing low cost loans tailor-made for small business owners.
Grow Your Business With LendThrive
Your YOY growth looks great, and you’re ready to expand your business! To do it, you’ll need fresh sources of capital; that’s where LendThrive comes in. LendThrive is a part of the AVANA Family of Companies and offers fixed rate business loans of up to $150K. LendThrive’s loans are flexible, with generous repayment terms that can be tailored to your business’s needs. Check out our loan calculator to determine your estimated loan cost and monthly payments.