If you own a seasonal business, like landscaping or event planning, you’re always on the lookout for those good months when your business shines.
But is your business shining brighter this year than last? That’s a question you can’t answer if you just keep surrounding yourself with seasonal figures.
So what do you need? A metric that helps you look past the seasonality and track your business performance over longer periods of time, like year-over-year (YOY) growth.
Let’s find out what, exactly, YOY growth is and how to calculate it.
YOY Growth Defined
Year-over-year growth is the change in a particular business metric over a year, like total revenue, operating profit, and net profit. Also called YOY growth rate, it helps determine your business’s financial health.
For instance, if you’re anxious about a new competitor opening across the street, you can look at your YOY net profit growth to see if it’s actually hurting your business.
Even large companies like Siemens Group use it. In 2021-22, Siemens Group’s orders and revenue increased by 22% and 7%, but their net profit experienced a negative YOY growth due to the sanctions on Russia.
But how can you calculate it for your business? Let’s find out.
How To Calculate YOY Growth
To calculate YOY growth, subtract the previous year’s value from the current year’s value and divide the difference by the previous year’s.
The year-over-year growth formula is:
YOY growth = (Current-year value - Previous-year value) / Previous-year value
You can use this formula to calculate the year-over-year growth rate of any financial figure like revenue, net profit, operating profit, or cost of goods sold.
The yearly values of these figures are usually in year-end income statements and balance sheets.
Ready to transform your business into a profit-pumping machine? Learn how with our monthly newsletter.
Example 1: Calculating Year-Over-Year Growth in Revenue
Let’s say you own a landscaping business and your sales revenue was $195,000 in 2021 and $230,000 in 2022.
You can calculate the year-over-year growth in revenue for 2022 by plugging these dollar amounts into the YOY growth formula.
YOY revenue growth = ($230,000 - $195,000) / $195,000 = 0.1794 or 17.94%
In other words, your landscaping business grew by almost 18% in 2022. Given that average growth in the landscaping industry stays around 5%, that’s a fantastic home run figure. Still, you must also keep tabs on your net profit to ensure you’re not spending more money than you’re making to get this growth.
Example 2: Calculating Year-Over-Year Growth in Net Profit
Say the same landscaping business returned a net profit of $20,000 in 2021 and $22,500 in 2022. You can get the net profit YOY growth with the same formula.
YOY net profit growth = ($22,500 - $20,000) / $20,000 = 0.125 or 12.5%
Or, you made 12.5% more take-home money in 2022 than in 2021. Since the net profit also increased with the increase in revenue, you can rest assured that you’re on the right path.
How To Calculate Year-Over-Year Growth in Excel
As a small business owner in 2023, you can use automation to calculate the YOY growth rate of different financial indicators. Microsoft Excel can do the work for you.
Step 1. Enter your dataset for the current year and last year in Excel cells.
Step 2. Add a column for YOY Growth and format the cells below it as Percentage. (This way, you won’t have to multiply YOY growth values by 100 to get a percentage.)
Step 3. Double-click D2 and enter the formula as = (C2-B2) / B2.
Step 4. Press Enter to let Excel calculate the result.
Step 5. You can also add more metrics below Gross Profit and their yearly numbers.
Step 6. Select the cell with the formula — D2 in our example — and drag the fill handle to copy-paste the formula in the cells below, as shown in the GIF.
How To Calculate Percentage Increase Over Multiple Years
While typical year-over-year growth calculations work most of the time, there are odd scenarios where calculating a percent increase over a longer time frame makes more sense.
For example, 2021 YOY growth numbers for a restaurant might be misleading since 2020 was a disaster for restaurants.
So in cases like that, you can calculate the rate for multiple years. You’d use the compound annual growth rate (CAGR) formula:
Ending value refers to the current-year value, and Starting value refers to the year-end value for the reference year. Finally, n means the number of years in the time frame. I know; we’ve thrown algebra into the mix, but it’s not that bad.
Let’s do an example to take the algebra mystery out of this formula using the following financial information for a restaurant.
Annual revenue in 2018 = Starting value = $140,000
Annual revenue in 2022 = Ending value = $225,000
Number of years = n = 2022 - 2018 = 4
Plugging these numbers into the CAGR formula gets you:
Or, the restaurant experienced a growth rate of 12.59% over the four years.
What Does Year-Over-Year Growth Tell You?
As a small business owner, you might often feel like you’re treading water to keep your company afloat. Unexpected or just day-to-day expenses can leave you in a rut.
If that’s the case, working out YOY growth for different performance indicators can help you get the real picture (see the forest for the trees).
Most businesses don’t experience equal revenue growth every month. Instead, you may have months where you’re minting dollars every week and then a month where the only sound is crickets.
Instead of packing things up after a down fourth quarter, you should look at your YOY growth for revenue and net profit to understand your business’s true financial health.
Is your YOY revenue growth rate negative? You might be losing customers to a competitor.
YOY metrics give you information on different aspects of the market. For example, if the year-over-year cost of goods sold increases too much, it might indicate there’s a supply line issue you need to look into.
While nobody wants higher costs, they’re part of the equation when raising revenue. For example, you can’t expect to expand your service area without adding more people to your payroll.
However, you must try to scale up your business operations without decreasing your business margin. The best way to monitor that? Look up your YOY metrics and ensure your costs aren’t eating into your profits.
For instance, in our landscaping example above, the revenue increased by 17.94%, but the net profit increased only by 12.5%. Even though your revenue increased significantly, operating costs prevented most of the money from reaching your bottom line. So you might need to consider trying to reduce fuel costs or replacing old equipment.
Now that you know what YOY growth tells you, all that’s left is to see how you can use it in your business.
How To Use Year-Over-Year Growth in Your Small Business?
You can use YOY metrics to understand your business, compare it with competitors, and find ways to improve your key performance indicators (KPIs).
Look for Issues with Your Operations
Unlike month-over-month metrics, YOY growth percentage numbers aren’t affected by seasonality or random chance. So after calculating the YOY growth rates of the metrics in your financial statements, you may go through them carefully to see if anything stands out.
For example, you may find that the payroll costs increased significantly due to a minimum wage increase, reducing your net profit. If that’s the case, you might want to pass on some of those increased costs to the end customers.
Bonus tip: Consider Hourly if your labor costs increase and you can’t figure out why. Hourly’s payroll platform helps you pay employees with a single click and tracks your labor costs, so you always have a bird’s-eye view of your payroll expenses.
Come Up with Reasonable Goals
A small business almost always has room for growth. You can look for new customers, expand to new areas, or introduce new products.
But how much should you grow in a given time frame? You may find the answer by comparing your business with similar companies. You may look at your competitors’ filings with the SEC to find their annual growth rates for the fiscal year.
Predict Future Performance
YOY business growth numbers can help you predict your company’s performance in the coming years. You can multiply your YOY growth with the current year’s number to get an estimate for next year.
However, a company’s growth might slow after an initial burst of growth, so it’s better to get a conservative estimate by basing your growth analysis around a number below the current year’s YOY sales growth.
Keeping Tabs on Your Financial Metrics
As with everything in business, you need to look at multiple metrics to make sense of the whole picture. You shouldn’t go gaga over strong month-to-month revenue growth if you can’t sustain that revenue for long.
Instead, use long-term indicators like YOY metrics to look past the seasonal fluctuations and get an overview of your business performance.