If your small business revenue spiked 30% last quarter, you might think you are poised to finish the year on a high note with bigger profits. After all, a 30% increase over three months is an impressive feat. Well, before you start to celebrate and assume that everything is hunky dory, there is something you need to do: Compare it against your business income from the same quarter last year. If your sales revenue jumped 50% during the same time frame last year, then you have a problem. This indicates that your revenue took a year-over-year hit of 20%. In short, your small business is not performing as well you might think.
That is why you should keep track of your company’s finances throughout the year, and make a point of comparing its year-over-year (YOY) performance. You have probably heard the phase year-over-year, as it used quite often in the business world. If you are not entirely sure what YOY is, how to calculate it, or how important it is, keep reading this blog post from Balboa Capital. It is your year-over-year (YOY) growth guide.
What is year-over-year growth?
As mentioned above, YOY growth is an important indicator of how well your small business is performing against a comparable time period. It gives you a bird’s-eye view of your company’s sales results and how they might be impacted by economic downturns, supply chain problems, increased competition, productivity issues, seasonality and other factors.
This is helpful because your sales results for a given time period are not always the same throughout the entire year. For example, your business might experience a dramatic increase in revenues during the winter holidays. Then, when the New Year commences, your revenues will return to their normal levels.
How to calculate YOY growth.
If you maintain accurate financial records on an ongoing basis, calculating your year-over-year growth rate will be as easy as 1-2-3. Before you begin, determine the time period that you want to compare, such as a month, quarter, or year. These are the most commonly used comparisons among small business owners, but you can also check the financial performance of a 9-month time frame, or a particular holiday season or holiday weekend.
To get started, pull the sales results for the time period that you want to evaluate. If your small business uses accounting software, you will able to access this information right away. Let us say that you own a deli and want to calculate your YOY growth for the final quarter of the year. If your Q4 revenues this year were $225,000, and last year they were $190,000, you had a YOY gain of $35,000.
The next step is to divide the difference by last year’s revenue number. In this example, you would divide $35,000 by $190,000, which equals 0.1842. You would then multiply that number (0.1842) by 100 to convert the growth rate into an actual year-over-year percentage rate. The result is 18.42%, which is your deli’s Q4 year-over-year growth rate.
Putting your YOY results to work.
In addition to providing you with invaluable information about your financial performance, your YOY growth can play an integral role in the borrowing process. If your small business has demonstrated robust YOY growth, you might be able to secure business funding with more a lower interest rate. Strong YOY growth is the perfect complement to a positive cash flow report and a low outstanding debt report that will accompany your loan or financing application.
If your YOY growth percentage is low or flat, you should begin looking for reasons as to why. You might find that you are paying too much for your inventory, in which case you should try to negotiate a lower price with your vendors. Take a good look at all of your overhead costs to see if any of them can be reduced, or eliminated altogether, without hurting your productivity or profits.
YOY data can help you pinpoint when your company’s revenue is increasing or decreasing, so use it to help drive your short-term and long-term business decisions. Finally, your YOY growth will be directly influenced by how well you run your small business. Excellent workers, top-notch products and services, a comprehensive inventory management system, and well-functioning equipment can lead to greater efficiency, happier customers, and, ultimately, strong YOY growth.