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Year over year, also referred to as YOY, is a term used in the financial sector to compare two or more measurable items. For example, a company might use the year over year calculation to measure revenue growth from the previous year. Investors and lenders also frequently use YOY data to evaluate a company’s financial health.
YOY is useful in various areas of your business. For example, you can use YOY to evaluate how your customer base is growing by comparing the number of current year additions to the number of prior year additions.
The YOY calculation is relatively straightforward, involving only two factors: the current year’s value and the prior year’s value. The current and prior year values can be anything that is easily measurable, like sales, costs, customers, and more. Here is the formula for calculating YOY:
(Current Year / Prior Year) – 1
Let’s go through an example of the YOY calculation. Sales in the current year ended up being $500,000. Prior year sales were $490,000. Members of management are interested in comparing the year over year growth of the company. First, you would take $500,000 divided by $490,000 to get a factor of 1.02. Now, subtract 1 from that number and you are left with 0.02. To get a percentage, you would multiply your decimal by 100, creating a YOY growth of 2%.
YOY comparisons rely on having accurate and similar data between periods. This means that the time period for the current year data and for the prior year data must be the same. Taking sales for five months of one year and six months of another wouldn’t generate accurate YOY comparisons.
Implementing a YOY approach can be a great strategy to monitor business progress and growth. Here are some of the benefits of year over year growth analysis:
Leveraging these benefits makes YOY comparisons popular for both business owners and external third parties, like lenders and investors.
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