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YoY Meaning & How It Is Used In Business Analysis

YoY

As a business owner looking to understand the basics of business analytics, you should be well versed about the meaning of YoY as it’s a term frequently referenced in business analytics and in financial documents.

YoY is an abbreviation of year-over-year, an important metric for the analysis and comparison of financial figures over a period of consecutive years. Through this, businesses can easily track changes in performance over time and to identify relevant trends in the industry and benchmark themselves against competitors.

With this guide, you’ll gain insight into how YoY works and why it’s beneficial for companies when it comes to managing their finances.

What does YoY mean?

Year-over-year is basically a comparison of two different years of the same timeframe. It examines the 12 month period ending in the current month against last year’s 12 month period ending in the same month.

YoY analysis helps in eliminating short term based data volatility which can come from monthly or quarterly trends and look at longer-term annual trends. Through this, lasting changes and prospects can be evaluated for future growth in areas including finance, economic development, operational, consumer satisfaction and other business aspects.

How is Year-over-Year calculated?

Yoy calculations are used to measure annual change from one year to the next and is calculated by taking the current value and subtracting it from previous year’s and then dividing the number by previous year’s value.

The formula looks like this:

YoY = (Current Year Value – Prior Year Value) / Prior Year Value

For example, if a company’s sales in 2021 were £10,000 and its sales in 2022 were £12,000, the YoY calculation would be:

YoY = (£12,000 – £10,000) / £10,000 = 0.2 or 20%.

This means that the company’s sales grew by 20% from 2021 to 2022.

Why use YoY analysis?

YoY analysis can be helpful in understanding the business’s growth and evolution over time. One can identify trends in the industry and use the analysis to benchmark themselves against competition. YoY can also be used to track key performance indicators- KPI- trends like cost reduction, sales growth etc. and predict future performance to help a business make better decisions.

One crucial thing to note is that these figures from YoY analysis should not be taken at face value. This is because data needs to be contextualised first to put meaning behind it. For example, a company may find from a YoY analysis that its sales have grown 20% which looks positive on the face of it, but it might seem unimpressive when compared to competitors’ performance or the wider market trend.

All in all, if you want to understand the performance of your business better including areas of growth, YoY can work as an important tool. You should however not take them at face value without putting them into context of performance in the wider industry or your business goals.

When is Year-over-Year analysis used?

Year-over-Year is a commonly used financial metric in business analysis.

Some of the most common uses of YoY analysis include:

  • Sales revenue – YoY analysis can be used to measure the overall performance of a company, as well as identify trends in customer buying habits.
  • Expenses – YoY comparisons can help businesses identify areas of cost savings and track how their expenses have changed over time.
  • Operating profit – YoY analysis can help businesses identify areas of improvement in their operating profit and make better decisions.
  • Cost per acquisition – YoY analysis can help businesses measure the effectiveness of their marketing efforts and track sales trends.
  • Customer loyalty – YoY analysis can be used to understand how loyal customers are and identify opportunities for improvement.

Does YoY account for seasonality?

Seasonal fluctuations in business performance are common, especially for those retailers which encounter spikes in sales during certain times of the year, like during back-to-school or Christmas.

YoY analysis is helpful in identifying patterns which may have been concealed by this seasonality. A business can get a clearer picture of their long term performance by looking at annual data as a whole.

A YoY analysis is also helpful in comparing monthly data across different years. For example, sales in winter months of 2021 may be compared to the same period in the year 2022. Changes in customer behaviour and spending patterns can also be identified by this.

What are the alternatives to Year-over-Year analysis?

There are other methods apart from YoY which are helpful in understanding business performance.

Consider month-over-month (MoM) analysis which compares monthly data of one month to another, quarter-over-quarter (QoQ) analysis which compares business performance from one quarter to another and the year-to-date (YTD) analysis which which gives performance insights from the start of the current year to present date.

Each of these methods has its own advantages and disadvantages, so it’s important to understand how each one works and decide which is best for your business.

Month-over-Month analysis

A month-over-month analysis is helpful in comparing the performance of one month to the same of the previous year. It helps in identifying short-term trends and changes along with fluctuations in consumer behaviour or seasonality.

Quarter-over-Quarter analysis

QoQ helps a business to understand their performance over one quarter of a year. It provides insight into possible long-term trends and changes and is also useful in tracking business cycles.

Year-to-Date analysis

The year-to-date analysis helps in tracking current performance of the year and understanding an up-to-date view of how the business is faring. It takes account of a business from the starting of the current year to the present date.

Benefits of analysing Year-over-Year performance

To understand how your business is doing progressively, YoY is an important analysis metric. It is an easy way to compare your business’s performance over time and identify various trends which you can review or modify to put your best foot forward.

Let’s take a look at some of the key benefits of monitoring your YoY growth.

1. Understand what’s working – and what’s not

Continuous improvement is the key to success in any business, but you can’t do this without the data to back it up.

By comparing your performance from one year to the next, it becomes easier to identify areas that may need further attention or where there have been successes. This can help you understand what is working and what needs to be improved.

2. Spot trends and changes in customer behaviour

YoY analysis is also great at helping businesses to understand consumer behaviour and spending patterns. Such insights can help you optimise pricing, sales and marketing strategies for the future.

3. Focus on long-term growth

It is possible for some months to have performed badly compared to others and YoY analysis helps a business to focus on the bigger picture and long-term goals rather than a micro month to month view point which may paint a more challenging picture than is true.

4. Secure future investment

A YoY analysis is more likely to be considered by investors and lenders and also when assessing the risks associated with investing in your business. Having strong growth over a yearly basis can help you secure further investments and partnerships.

5. Identify errors and discrepancies

Errors and discrepancies in data can also be identified in a YoY analysis. Business owners can take prompt corrective measures to ensure the accuracy of their data to avoid causing potentially costly mistakes.

Risks of using Year-over-Year analysis

Whilst there are many benefits of using YoY data to inform your business analysis, there are also some risks that you should be aware of.

Let’s take a look at some of the key risks of YoY analysis.

1. Over-reliance on a single metric

One of the primary risks of using year-over-year analysis is that it can lead to over-reliance on a single metric. This can be problematic if business performance insights are constrained to one metric and not considered in conjunction with others that add context to it.

2. Difficulty comparing data from different years

The economy doesn’t stay the same forever and many factors contribute to its ups and downs. As a result, year-over-year comparisons may not always be accurate or representative of the underlying data.

For example, the COVID restrictions badly impacted the economy and if yearly data is compared, many businesses would’ve been in the red during that year which isn’t a true projection of how a business might do in the future.

3. May not reflect true underlying trends

Year-over-year analyses are influenced by short-term fluctuations that aren’t indicative of long-term trends. As a result, YoY data comparisons can’t reflect true underlying trends which a business or a particular industry might have. For this reason, businesses need to be mindful while interpreting year-over-year data and use other metrics to form a comprehensive picture.

4. Can lead to “gaming” of the system

Some businesses might manipulate their data to reflect success and better results in their year-over-year analyses. This is “gaming” of the system and is an unethical practice. Business might look good on paper but long-term, this can cause problems and even damage the reputation and integrity of a company, particularly if it is looking for investment in future years.

5. Requires significant historical data

Finally, another potential drawback of using year-over-year analysis is that it requires significant amounts of historical data in order to be effective. Without a good dataset, it can be difficult to draw meaningful conclusions from year-over-year comparisons and the results may not be accurate or reliable. For this reason, businesses should ensure that they have sufficient historical data before using this type of analysis.

FAQs

What does 100% YoY mean?

A 100% YoY indicates that the performance of the company increased by 100% as compared to the same period last year. It can be about sales revenue, expenses, satisfaction rate or any metric.

How do you calculate YoY growth?

Year-over-year growth is calculated by the following way: taking the difference in performance between 2 different periods (usually 12 months apart) and dividing it by the original amount. The result is given in a percentage to indicate whether the performance increased or decreased.

What does a negative YoY mean?

A negative YoY of one year’s figures is indicative of decreasing performance of a business area as compared to the previous one. It can be any business area- sales, marketing expense, revenue etc.

Is YoY analysis useful?

Of course! YoY analysis can be an important business tool since it shows the changes in performance over time and can help in recognising areas where improvement or deterioration in performance is evident. Important insights about consumer behaviour or seasonality may also be looked at which aren’t visible in short-term analysis.

Why is YoY important?

YoY is an important tool for business owners who want to better understand their business performance and identify areas of improvement. It’s useful for tracking long-term trends and can help create more informed strategies for the future.

YoY provides invaluable insights which can lead to a better decision making process based on historically accurate and long-term data. It allows companies to focus on what is working for their business and what needs to be upgraded to ensure continuous growth over time.

Final thoughts

Year-over-year analysis is a key tool for businesses to understand their performance and plan for future growth. By understanding these benefits, owners can optimise their strategies and improve chances for investments.

Making the effort to regularly assess your YoY growth can help you get a better grasp of what’s working in your business, and identify areas that may need some extra attention or improvement, ultimately helping your business to achieve long-term success.

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