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Finance glossary

What is Year Over Year (YoY)?

Bristol James
2 Min

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.

How to calculate YOY

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.

The Benefits of Tracking YOY

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:

  • Quick Calculation – Calculating YOY is relatively straightforward and can be done in a matter of minutes.
  • Comparability – YOY allows you to track important financial metrics, like your annual growth rate.
  • Goals – YOY gives your team something tangible to work toward. For example, if you want to grow 5% in the next year, your team members can frequently check the calculation to gauge progress.
  • Seasonality – YOY comparisons are beneficial to avoid seasonality when analyzing the performance of your company.

Leveraging these benefits makes YOY comparisons popular for both business owners and external third parties, like lenders and investors.

Summary

  • Year over year is a calculation used to evaluate a company’s performance from one time period to another.
  • The YOY calculation applies to a variety of business factors, from sales and costs to customers and employees.
  • Year over year uses the following calculation: (Current Year / Prior Year) – 1
  • YOY is beneficial because of the quick calculation, the comparability opportunities, defined goal creation, and the ability to mitigate seasonality.

 

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