How To Use Year-Over-Year(YOY) Growth To Grow Your Small Business?

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. Hence you need a metric that can give you an instant indication of your business growth.

Year-over-year, often referred to as YOY, is a popular metric used to compare data from the current year vs. the previous year. This metric gives you an assessment of key financial metrics such as revenues, expenses, and profit which eventually helps analysts spot growth trends and patterns needed to make strategic business decisions.

So how do you calculate it?

Formula to Calculate Year-Over-Year Growth

To calculate YoY, you first need to decide what kind of growth you want to measure.
Is it profit, or revenue, or expenses?

So if you want to calculate the YoY revenue, you first need to calculate the income statements and balance sheet of your current and previous year.

Let’s take an example:

The net revenue of this company ending in the year 2019 was $42K and suppose in 2018 they did a revenue of $35K.

Year-over-year Growth = (42,000/35,000) – 1

= ((42,000 – 35,000) / 35,000)

= (7,000/35,000)

= 0.2 or 20%

ABC company grew its revenue by 20% year-over-year.

But calculating sales, profit, and expenses isn’t as easy as it looks in these examples. Managing expenses, revenue, accounts receivable, accounts payable, sub-ledger accounting, reporting, and analytics can become a headache for you as a business owner who will prevent you from capturing future growth opportunities.

Hence we at mesha cover all the things for you. From Bookkeeping to Taxes with our dedicated bookkeeper and expert CPAs.

So how can this one simple metric with a simple formula help you grow your business?

How to grow your small business with Year-over-Year Growth

You can use YOY metrics to understand your business, compare it with competitors, and find ways to improve your key performance indicators (KPIs). Here’s how you can use Year-over-Year growth metric to your advantage:

Seasonal Insights

As a small business owner, you may often face seasonal fluctuations. YOY comparisons help you differentiate between normal seasonality and genuine business problems. Unlike month-over-month metrics, YOY growth percentage numbers aren’t affected by seasonality or random chance.

For example, if you sell more during the holiday season, YOY data can show you whether your holiday sales are truly growing or if it’s just a recurring trend.

Attract Investors and Secure Loans

Positive YoY growth is like having a compelling elevator pitch that’s tough to resist. Year-over-Year (YOY) growth can make your business a magnet for investors and lenders. A positive YOY growth shows them you’re making money, and you’re doing it consistently. That’s music to their ears. Lenders might offer you sweeter deals – lower interest rates, longer repayment terms – because they see your business as a safer bet. It’s like getting a loan with a cherry on top, making it easier for your business to expand.

Evaluate Marketing Efforts

YOY growth can be a litmus test for your marketing efforts. If you’ve increased your marketing spend, you should ideally see a corresponding boost in sales or customer acquisition. If not, it’s a sign that your marketing strategies may need reevaluation.

Sets Realistic Goals

Setting realistic goals with Year-Over-Year (YOY) growth is like planning an epic road trip – you need a map, and YOY data is your trusty GPS.

Imagine you’re planning a road trip from one city to another. You look at YOY data as your past trips – it’s your reference point. You know how long it took you last time, so you set a realistic goal to either match or beat that time. In the business world, YOY data is your past performance, and it helps you set goals based on what you’ve achieved before.

In addition, it also motivates your team. If you tell your crew, “We’re going to reach the destination 10% faster this time,” they can see it as a reasonable challenge. It’s like telling them, “We’re going to make this road trip more efficient because we’ve done it before, so we can do it again.”

Real life example

Mama Wilson Homemade Cookies.

It is a small, family-owned bakery that specializes in delicious, homemade cookies and baked goods. The business started as a local cookie shop in a small town, but with a keen eye on YOY growth, they achieved significant success.

How Year-Over-Year Growth metric helped their business:

Expansion of Product Line: In their first year of operation, Mama’s Homemade Cookies primarily sold a limited variety of cookies. However, by tracking YOY growth, they noticed an increasing demand for specialty cookies and custom-order cakes. In response to this trend, they expanded their product line to include a wider range of baked goods.
Diversification of Sales Channels: After a couple of years in business, YOY analysis revealed a consistent uptick in online sales. Recognizing this potential, the business invested in building a user-friendly website and implementing e-commerce solutions. This allowed them to reach a broader customer base, including those outside their local area.
Seasonal Offerings: YOY data indicated that certain cookies sold exceptionally well during specific seasons, such as holiday-themed cookies during Christmas. To capitalize on these trends, the business introduced seasonal cookie sets and marketing campaigns tailored to these periods.

Cons of Year-Over-Year Growth Metric

So YoY can be a real genie that helps you fulfill your wishes. But like everything, let’s flip the coin and examine what the YoY growth metric lacks.

Strategy Stagnation

Overreliance on YOY growth can sometimes lead to an inertia in business strategy. Businesses may stick to what has worked in the past rather than adapting to new market conditions or opportunities which eventually leads to stagnant growth in the future.

Hiding Trouble

YOY growth can be a bit like sweeping problems under the rug. For example, YOY can still show positive growth if you had a great year, but if growth starts to slow down. It might lull you into a false sense of security, and you might not catch problems in time.

Limited Adaptability

Not every metric in business is suitable for YOY analysis. You need to study metrics like customer satisfaction or employee engagement that cannot be captured by YOY numbers. It’s like trying to measure happiness in miles per hour; it just doesn’t work

Factors affecting Year-over-Year growth:

Just like a seasoned sailor knows how external factors can affect his boat, you, as a business owner, need to factor in external influences when navigating Year-Over-Year (YOY) growth. These elements can turn a smooth sail into a turbulent one or give you a mighty tailwind, significantly impacting your YOY growth:

Market Trends:

Impact: Changes in consumer preferences, emerging technologies, or shifts in demand can influence YOY growth. For example, a sudden trend favoring healthy eating can boost YOY growth for healthy food products.
How to solve it: Stay informed about market trends by conducting regular market research. Adjust your product or service offerings to align with prevailing trends. Compare your YOY growth to industry benchmarks to see if you’re in line with broader market shifts.

Economic Conditions:

Impact: Economic conditions, such as recessions or economic booms, can affect YOY growth. During economic downturns, consumers might reduce spending, impacting your sales and growth figures.
How to solve it: Diversify your product or service portfolio to cater to different economic scenarios. During economic downturns, focus on cost-effective solutions or special promotions to maintain growth. In prosperous times, consider investing more in innovation and expansion.

Customer Feedback and Surveys:

Impact: Gathering customer feedback and conducting surveys can help you understand how external factors influence YOY growth. If customers are less satisfied due to external factors, it can affect your growth.
How to solve it: Actively seek and analyze customer feedback. Make adjustments based on customer suggestions or concerns. This can help maintain customer loyalty and mitigate the impact of external factors on growth.

Parting thoughts

Mastering the art of calculating and using Year-Over-Year (YOY) growth is akin to having a compass that guides your business.

Think of it like a treasure map that helps you navigate the sometimes tricky terrain of business data. It’s not just about numbers; it’s about understanding trends, spotting opportunities, and fixing problems. Embrace this invaluable tool, use it wisely, and watch your business thrive year after year.

How to use Year-Over-Year(YOY) growth to grow your small business?

Formula to Calculate Year-Over-Year Growth