Year Over Year (YoY)
What is YoY?
Year over year, or YoY for short, is a calculation used to see a business’s growth or loss compared to the same period of time during previous years. For example, when calculating YoY, a company might look at profits and losses over Q1 in 2020 and 2021, or make it more specific and look at the holiday period of December 2020 and December 2021 to analyze the differences. A YoY comparison can be made monthly, annually, quarterly, or for any event that repeats itself over the course of the years, such as holidays or set sales events.
The YoY calculation is not only used to gauge how a business is performing but can also be used to forecast sales, create a new budget, and evaluate investments. For someone who’s just starting a business and doesn’t have data from a previous year, there are alternative metrics to consider, such as month over month (MoM), month to date (MTD), or quarter to date (QTD).
How to calculate YoY
The YoY formula is relatively simple to follow and can be done in just a couple of steps.
01. Take the metrics you want to analyze and subtract last year’s number over this year’s number. If the number is positive, that means the business gained over last year, and if it’s negative, the business has seen a loss. For example, if a company sells 500 t-shirts last year and 550 this year, it’s grown by +50 sales.
02. To get the difference of this year over last year as a rate, divide the difference by the previous year’s number. So, divide 50 by 500 and you get a 10% growth rate.
Here’s what the YoY formula looks like in simple terms:
(Last year - This Year) / Last Year
Year over year is often used to calculate profits and losses, but can also be used to compare almost any metric a business wants to analyze. The same YoY formula can be applied to calculate metrics like employment rates or rate of user growth.
To best understand business success, we suggest starting by creating a website with a website builder that has built in analytics tools, like Wix. Then, utilize these tools to analyze your site’s performance and track changes over time. YoY can also be used to measure traffic to a webpage by looking at the rate for metrics like what device users are browsing on, traffic sources, or average time on page.
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Pros and cons of YoY
Year over year is just one rate businesses should be calculating to measure success as part of their accounting work. It’s also important to look at other metrics to get a full picture of how a company is performing because YoY won’t show everything on its own. Still, YoY remains a popular bookkeeping method to analyze performance for many business owners, and with good reason. Let’s look at some pros and cons of using the YoY rate.
Pros of YoY
Since a year over year calculation looks at the same time period over different years, it’s a good way to avoid misleading measurements by avoiding seasonality. For example, retailers might experience a dip in sales in January or February as compared to the popular shopping period of November and December. However, this doesn’t mean the business is performing poorly, just that shopping trends differ by season. YoY takes this into account making it easy to compare actual growth. Additionally, since the metric for YoY is calculated as a percentage, it makes it easy to compare to competitors in the same industry even if the companies are completely different sizes.
Cons of YoY
There are some drawbacks to analyzing a business with a YoY rate. This type of calculation doesn’t account for any events that aren’t built-in to a yearly calendar. For example, if there’s a stock market crash or an investment in a company that increases employment or sales, this won’t be reflected in the YoY rate. In order to get a complete overview of a company’s performance, it’s vital to look at YoY in conjunction with other metrics to understand the whole story.
Additionally, since most people who use YoY are focused on finding the rate of growth from one year to the next, it’s easy for abnormalities to fall through the cracks. A month with exceptionally low or high growth won’t appear as an anomaly when only looking at the full-year YoY number as opposed to the same calculation broken down by month. It is therefore essential to look at both monthly and yearly in tandem.
Examples of YoY
The holiday season is critical for retailers, with many businesses basing an entire year’s success on their fourth quarter. Retail giant Macy’s relies on holiday purchases to increase its sales numbers each year. By looking at Macy’s Q3 vs Q4 earnings in 2020, it seems as if the company performed well since there was an increase in reported revenue. However, by comparing 2020’s Q4 over 2019’s Q4, the earnings-per-share declined by 62% due to the Coronavirus pandemic. The pandemic might show losses that YoY doesn’t account for, so this is why it’s important for businesses and investors to consider YoY in light of current events and other metrics that give a more accurate representation.
Year over year calculations can also be used by other industries aside from retailers. Governments and economists might use it to calculate a country’s GDP, and healthcare providers can also use it to calculate total patient care costs with the introduction of new policies or infrastructure. Manufacturing is one industry where YoY is a focal metric. Manufacturing jobs have been declining for years, so calculating the rate of job loss in this industry is an effective way to measure how much and how quickly it’s changing. Not only that but since the manufacturing industry relies on the efficiency of its production lines, calculating how much the rate of production increases or decreases is essential to analyzing the overall performance of a plant.