Business financial reports provide information that are useful for decision-making, compliance, and performance evaluation. But on top of the standard financial reports such as income statements and balance sheets, financial analysts use other different metrics to make a deeper evaluation of an organization’s financial performance and position. And there is a simple but powerful tool that even small business owners can use to better understand their business, the Year-Over-Year analysis, also known as Year-On-Year (YOY) analysis.
What is Year-Over-Year Analysis?
Year-Over-Year analysis compares data from a specified period in the current year to the same period in the previous year. It is commonly used in business to identify patterns, analyze seasonal trends, and performance over time. YOY analysis is also used in making financial projections and business strategies.
Benefits of YOY Analysis
Measuring Growth and Performance – Most financial analysts prefer the YOY metric over the month-to-month comparison when measuring performance since the latter often reflects seasonal growth or decline.
For example, a gift shop may show a staggering growth in sales in December compared to November, while a decline in sales may be recorded come January. In this scenario, and in most cases, a YOY analysis can provide a better insight of the gift shop’s sales performance by comparing their December sales to the same month of last year. That way they can evaluate if the business is actually growing or not since they are comparing the strength of their sales during the same holiday season.
Identify Opportunities and Create Business Strategies – A business can compare data over multiple years to spot seasonal trends and consumer patterns which can help businesses prepare for expected surge in consumer consumption during peak season while creating business strategies in period with expected lower sales revenue.
For example, a restaurant may find that there are specific months when they have more customer visits compared to the rest of the year. The restaurant should then prepare to accommodate the surge in customers and ensure that they have enough inventory to fill the menu during these identified months. They can avoid lost sales or opportunities by being prepared especially during their peak seasons.
In the identified months when the restaurant expects lower sales, they can prepare a plan or business strategies to boost sales such as offering discounts, promotions, or providing loyalty incentive programs.
How to Compute for YOY
The YOY formula is simple and is commonly presented as a percentage. Below are two ways to compute for YOY:
YOY % = (Current Year Amount – Previous Year Amount) / Previous Year Amount
Or
YOY % = (Current Year Amount / Previous Year Amount) – 1
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