What Does Year-Over-Year (YOY) Mean?
In the business world, the term Year-Over-Year, or YOY for short, refers to a method of tracking and reporting annual financial growth or decline. Finance in business is an ever-raging battle and keeping your company on the up and up is imperative to your long-term success! YOY is a popular and effective way of tracking a company’s performance and is used by all major business minds, so it’s an important term to understand if you are on the rise in the corporate realm. Put simply, YOY means taking results from one year and comparing them to the same set of results from the year before. The difference between the two is the Year-Over-Year growth percentage.
- 1 What Does Year-Over-Year (YOY) Mean?
- 1.1 How Is YOY calculated?
- 1.2 What Factors Must You Consider When Calculation Year-Over-Year?
- 1.3 Why Do Businesses use Year-Over-Year Reporting?
- 1.4 What Makes Year-Over-Year a Reliable Method of Tracking Performance?
- 1.5 What Are Year-Over-Year results used for?
- 1.6 Is YOY the Same as Year-To-Date?
- 1.7 Are There Downsides to YOY Tracking?
How Is YOY calculated?
Let’s say a manager wants to track the YOY sales results for their merchandise team. To calculate this information, they would need to start by taking the total sales income from year A, and the total sales income from year B. If, for example, in year A the total was $900, and in year B the total was $990, the Year-Over-Year growth percentage would be 10%. This means that in year B the merchandise team sold 10% more than they did in the previous year.
To calculate percentage manually, you divide the difference between year A and year B ($90) by the total of year A ($900). You then multiply that number (0.1) by 100 to find the percentage.
If math is not your favorite subject and perhaps not in your wheelhouse of impressive skill, there are plenty of online percentage calculators you can use to help you.
What Factors Must You Consider When Calculation Year-Over-Year?
The most important thing to be sure of when calculating YOY is the time frame. You must be sure to take results from exactly the same period otherwise the growth or decline percentage will not be accurate. If you take the first set of figures from 00:00 on the 1st of January 2019 until 23:59 December 31st, 2019, you must use the same timing for the 2020 results, or if you were tracking the sales for only the month of July, you should do the same for the following year. Some companies may track results from the first business day of the year until the last rather than specific dates and times which is also fine, provided the same criteria are used for the year or month of comparison.
Why Do Businesses use Year-Over-Year Reporting?
The takings in a single month in business mean very little if they do not have context. To say your company pulled in $200,000 in May could be either amazing news or a huge disappointment, but with nothing to compare it to, it means nothing. If, however, you used YOY reporting to show that last year, the month of May saw you earn $400,000 you could then see clearly you have suffered a 50% Year-Over-Year decline. Businesses use YOY to keep track of how their sales are dropping or rising annually and to compare monthly or quarterly results to the same period from the previous year.
What Makes Year-Over-Year a Reliable Method of Tracking Performance?
YOY is a reliable way of gauging the true performance of your business. Most companies also track results on a quarterly, monthly, or even weekly basis for a more short-term indicator, but many variables can impact this type of reporting, giving a skewed representation of success or failure.
The retail business, for example, has a busy season and a low season, so from one month to the next financial reports could show a drastic jump or drop in sales which does not necessarily reflect performance; however, a YOY report comparing March 2019 to March 2020 would provide a more accurate view of how things were looking.
Seasonal volatility is something many industries face and there is no escaping the fact that certain times of the year will be more lucrative than others depending on the business you are in. The YOY tracking model bypasses these variants to give a clear overall picture of how well you performed against the same seasonal influx of the year before.
In the same sense, the first-quarter results could be exceptionally high and the second quarter much lower which could have the appearance that your company has not done well in the second quarter. However, the first quarter of the previous year could have yielded even better results but the second not so good, meaning that, in fact, the second quarter has been more successful than the first, year-over-year.
What Are Year-Over-Year results used for?
Aside from keeping track of your performance for personal reference and general business use, YOY results are useful for investors and market researchers. An investor in a company can look at the reports to see how well a company is performing financially to gauge how well their investment is being used, and a potential investor could ask for YOY financial results to decide whether they want to get on board. Market researchers use year-over-year tracking to see if interest is declining, remaining steady, or on the rise.
Is YOY the Same as Year-To-Date?
Year-To-Date is not the same as Year-Over-Year. YTD refers to changes over the course of a single year whereas YOY looks at a separate year’s performance. Year-To-Date focuses on yearly trends within a business and can track how well you are doing against your competitors.
Are There Downsides to YOY Tracking?
If you use the YOY model too generally, meaning you only track a full year against a full year, you can miss important statistics happening monthly unless you combine them with other methods of reporting. Year-Over-Year tracking is a great comparative tool but should not be the only one you follow. You should always track month-over-month results as well.
If the data shows you to have a negative growth percentage one month, your continuous results will be skewed, and the information negated.
In summary, the year-on-year tracking model is an excellent tool to keep track of how your business is performing financially on an annual basis. When used properly, YOY can give you a quick overview of growth without seasonality impacting the true results. For those new to the exciting and turbulent world of business and finance, it can be an excellent tool to make sure you are on the right track!