Is the company truly growing? Are revenues increasing or decreasing? Has the customer base expanded?
Data holds unbiased answers to these critical questions, offering a transparent reflection of reality.
For a business, numbers tell the story of its history, current state, and potentially its forward trajectory. When analysed through different metrics, such as revenue growth or customer acquisition, numbers provide holistic and reliable insights into a company's progress. Understanding and interpreting these financial metrics is essential for enhancing business performance. Year-over-Year (YOY) analysis is a key tool that helps analyse these metrics.
Discover the meaning of YOY, its importance, the method of calculation, and how YOY analysis can enhance your business strategies in this guide.
Understanding Year-Over-Year analysis
What is YOY analysis?
YOY analysis simply means comparing year-over-year or year-on-year data. It is a method to evaluate and compare different metrics over a specific time period with the same time period in the previous year or years. For example, Q1 2024 is compared with Q1 2023 and Q1 2022 data.
Some key performance metrics compared include revenue, profit, expenses, and customer metrics. This is done to relate and derive insights such as fluctuations in financial performance over the years.
Importance of YOY analysis
YOY analysis is widely used to assess performance, offering a quick review of whether a business is steady, improving, or declining. Year-on-year comparisons are essential for identifying trends in various metrics and business areas over time. Any sudden anomaly signals change, which can be either positive or negative depending on the metric. For example, consistent increases in revenue and profits indicate steady growth, while sudden drops may signal underlying issues requiring investigation and corrective action. Similarly, reductions in expenses or customer acquisition costs can signify improved efficiency.
YOY analysis is not limited to financial performance but also extends to tracking progress in areas such as sales, marketing and even people management. This tracking enables businesses to pinpoint successful strategies and areas needing adjustment, facilitating informed decision-making. Thus, YOY analysis plays a crucial role in driving evidence-based decisions for the company.
Providing insight into the company’s financial performance and its trajectory over time, year-on-year metric changes hold significance for investors and obtaining funding. The direction of YOY growth can heavily influence investor decisions.
Year-Over-Year vs. Month-Over-Month & Quarter-Over-Quarter
Quarter-over-quarter (QoQ) and month-over-month (MoM) analyses are similar to year-over-year (YOY) analysis. QoQ and MoM compare data between different quarters and months, respectively. YOY analysis is more suited and effective for showcasing long-term trends, as it involves a larger dataset over the course of years. In comparison, MoM and QoQ analyses are more volatile and can show significant differences in outcomes due to small events. However, they are useful for identifying immediate changes and trends. A month-to-month comparison within the same year offers a better representation of seasonal fluctuations and trends.
How is YOY change calculated?
The formula for YOY percentage change involves taking the difference between the current and previous year's values, dividing by the previous year's value, and multiplying the quotient by 100.
Formula for YOY calculation
The formula to calculate YOY change is as follows:
YOY Change % = (Current Period Value – Prior Period Value) / Prior Period Value x 100
An example of calculation
Let's determine the growth rate of a company using the formula above, with revenue as the metric.
Revenue for Q4 2023= £2.2 million
Revenue for Q4 2022= £2 million
The formula will be
(Current Period Revenue – Prior Period Revenue) / Prior Period Revenue x 100 = YOY Growth %
(£2.2 million - £2 million) / £2 million x 100 = YOY Growth %
(£0.2 million) / £2 million x 100 = YOY Growth %
0.1 x 100 = YOY Growth %
10 = YOY Growth %
This means the company has witnessed a 10% growth in revenue from Q4 2022 to Q4 2023.
Interpreting YOY results
The value derived from YOY analysis, when positive, indicates a net increase in the calculated metric compared to the previous year. Conversely, a negative value signifies a decrease. However, simply interpreting the change as positive or negative for the business isn't straightforward. It depends on the context and what the changes signify.
A thorough analysis involves examining various metrics together. For example, a drop in profitability might indicate potential issues for a company. However, if sales volume has increased, it could suggest a different scenario. There could be more than one underlying reason for profit decline. It may stem from resource mismanagement, which is concerning, or from substantial investments in expansion, which could be beneficial in the long term.
Leveraging YOY analysis for strategic business planning
Let’s explore how insights gained from YOY analysis shape business strategies and decisions.
1. Monitor efficiency
Analysing year-on-year changes in different metrics can highlight discrepancies and help identify inefficiencies in the system. For example, if a company witnesses an increase in sales but a declining YOY growth rate, it indicates potential inefficiencies needing further investigation. This investigation might uncover issues such as increased Cost of Goods Sold (COGS) or reliance on discounts to boost sales, which could reduce profits. Therefore, regular monitoring of year-on-year changes in key parameters across business functions is crucial for maintaining efficiency and promptly implementing corrective actions to enhance performance.
2. Benchmarking
YOY analysis allows you to benchmark your performance against your own best performance as well as your competitors. It helps you see where you stand amidst industry standards and competitors, providing valuable insights into how well you are doing or how far you are lagging. This comparison offers a clear benchmark for evaluating progress, identifying areas for improvement, and guiding strategic initiatives to maintain or achieve a competitive edge.
3. Address seasonality in performance monitoring
Many businesses experience periods where demand for certain goods and services are higher or vice versa. For example, retailers often see a surge in sales during the last quarter or the holiday season. YOY analysis helps overcome the impact of seasonality when analysing business performance. It allows for the comparison of a specific month or quarter to the same month or quarter in the past. This provides a better understanding of the company's performance.
4. Forecasting and goal setting
Understanding performance against benchmarks and analysing historical trends year over year is crucial for making accurate predictions and forecasts. YOY analysis helps ensure forecasts are accurate by factoring in seasonality and avoiding skewing from temporary or seasonal fluctuations, thus providing a clearer picture of underlying trends.
Benchmarking, forecasts, and historical performance are also helpful in setting realistic goals for the future. For instance, consistent growth indicates that the company should aim to maintain or exceed this growth in future targets.
5. Budgeting and financial management
Studying trends in revenue, expenses, and market conditions is crucial for projecting future financial performance accurately. By providing accurate forecasts for revenue and expenses, YOY analysis aids in accurate budgeting and financial planning. Additionally, it can help identify cost-saving opportunities and strategically plan future revenue streams and investments.
6. Resource allocation
YOY analysis aids in resource allocation by identifying growing areas, underperforming segments, and operational inefficiencies, guiding decisions on where to allocate resources or make improvements. Additionally, forecasts and budgets derived from YOY data provide a clear scope of resource needs and availability.
Limitations of YOY analysis
Young businesses may find YOY analysis impractical because it focuses on long-term trends spanning multiple years. They might benefit more from MoM (Month-over-Month) analysis.
YOY analysis fails to capture short-term fluctuations within the year and slow-developing trends. It is also vulnerable to the impact of one-time events such as natural disasters or market crashes, which can distort performance comparisons.
Financial analysis made easy with Financials
Effective strategic decision-making and maintaining competitiveness hinge on timely YOY and other financial analyses. However, keeping up with the fast-changing business landscape requires the right technology. Outdated software can be time-consuming, often requiring extensive data manipulation in Excel spreadsheets to present to the CEO and board. This workload can be significantly reduced with a financial software solution such as Financials.
Financials is a cloud-based (SaaS) financial management solution. It centralises and provides accurate information in real-time. It enables seamless reporting, automated processes, and detailed financial insights across all areas including general ledger, accounts payable/receivable, reconciliation, invoicing, and project tracking. With over 1,000 sample reports and customisable dashboards, Financials ensures data is always current and accessible. Reports can be exported to Excel or integrated with platforms like Tableau and PowerBI for deeper analysis.
With Financials, elevate your financial analysis capabilities and transform complex data into actionable intelligence, driving growth and success.