It’s important to calculate the company’s statistics from time to time. Therefore, many companies use the year-over-year means to check their overall performance. Moreover, the financial stability of a company depends on a thorough understanding of all the affairs, hence, it’s important to do a year-over-year evaluation. So, what’s it all about? And what are the pros and cons of checking a year-over-year of the firm? In this article, we will discuss Year-Over-Year and the pros and cons of this method.
Table of Contents
- What’s A Year-Over-Year?
- How To Calculate?
- What Are The Pros Of Year-Over-Year Growth?
- Here Are Some Disadvantages Or Cons Of Year-Over-Year Growth
- Final thoughts
What’s A Year-Over-Year?
A company does a financial and statistical evaluation every now and then. So, the calculation of a Year-Over-Year is checking out the details of one period to the details of the previous year. Moreover, a company does the calculator based on the period on a monthly or quarterly basis.
Through this calculator, you can check out how much a company has grown over time. In addition, through this means, an investor and you, can compare the details of the two years and come up with possible answers as to how to improve the company in a better way. It also shows you where the company stands as of yesterday.
A firm does this calculation to check the revenue rate as well. Through this formula, you can also present a chart for the performance of a film. So, this is one of many means through which you will get a broad picture of the company. Moreover, you can use this formula to good effect on other key indicators of the company’s performance. For example, the statements, and balance sheets.
How To Calculate?
So, if you are looking to apply this formula, it’s important to know how it works, right? Well, it’s pretty much easy and straightforward. First, you have to choose the details of the earnings from a specific period, for example, a fourth quarter from the last year’s revenue. Thereafter you have to subtract the amount from the fourth quarter of the present year’s revenue number.
Thereafter, you can proceed to the next step. After getting the difference amount, you have to divide it with the earnings of the last year. Then you have to multiply it by 100 to get a percentage figure which will show you the growth rate, or loss rate, whatever’s the case.
So, here’s the formula in a quick shot
(Earnings of the current year – Earnings of the Last year) / Last year’s earnings x 100
So, you just have to put the numbers into this formula and find out the year-over-year growth rate of the firm. It’s really simple and effective to use. So, how would you get those numbers? Well, you have to see the balance sheet for it.
But, if you don’t have the yearly balance sheet, then you can take the monthly or quarterly earnings as we discussed above. But it’s important that you compare the same amount. For example, you cannot compare between a 3-month revenue of last year with 4-month revenue of this year. That wouldn’t make any sense and you won’t get a proper result.
What Are The Pros Of Year-Over-Year Growth?
Since there are several pros of using this method to check out the growth of your firm. In fact, it’s a pretty cool and unique way to analyze the overall performance. So, let’s check them in detail.
1. Checking if you are going in the right direction or not.
If you own a company, then it’s important to check whether you are getting some success or not. Therefore, you can do the YOY method and get the growth rate of your firm. Moreover, it’s crucial for your business if you are doing it for more than 13 months. Otherwise, you won’t be able to use the YOY method. So, from the data you will get, you can come to terms with how the business is doing overall. In fact, it will also show you some problems if your company has any,
For example, there are instances where the company has its sales figure high. However, the YOY growth rate is not high as it’s supposed to be from a high sales figure. Therefore, you will find that something is malfunctioning the company’s productivity. If the overhead and cost for the expansion are high, then it can also show this type of result.
2. Providing simple and straightforward data to the lenders
Since this YOY method can indicate the results of your long-term business better than the monthly or quarterly basis metrics, it’s really valuable for the business as others would find the information extremely useful.
In fact, the banks, decision-makers, investors, and lenders, all of them, would want to have clear-cut information about the company’s stats. Most importantly, a Lender would want to review the information provided by the YOY method before giving a loan. Therefore, this YOY growth calculator is really important.
3. Good for the seasonal businesses
If you have a seasonal business, then it’s a really good method to use. So, in this type of business, you will see that some of the months or quarters have exponentially higher profit while other times, you will see a lower profit.
So, it can be a bit problem for your business.
However, through the YOY growth figure, you will get over these fluctuations, as it will provide you with an even bigger picture of the firm. If you can pinpoint the shortcomings, then it will be only easier to solve them.
Here Are Some Disadvantages Or Cons Of Year-Over-Year Growth
We mentioned some of the pros of using this system. However, there are also some cons of this system as well, though it’s not much. So, let’s take a look at those cons.
1. Short-term calculations
So, if you are using YOY to calculate the very short time growth of your business, that won’t work. However, if you are trying to find out the long-term changes or annual accounts of your business, then using this system is effective.
2. Business Should Be 13 Months Old Or More
This is another drawback of this system. If your company is less than 13 months old, then you won’t be able to use the YOY formula, because, for that, you need a minimum of monthly or quarterly period of the previous year. Therefore, if a business is anywhere less than a year, then this method won’t give results.
3. Ineffective To Calculate Abnormal Fluctuations
Suppose, your business goes through an abnormal loss in a month. Since YOY provides a broader picture with full-year revenues, you might miss those abnormal low growth for a specific month.
In the end, the world of business is quite big. Among the abundance of data and figures, it becomes difficult to keep a track of the progression of your business. However, thanks to the YOY calculation method, you just need to know some of those numbers to find the broad picture of your company and see if there are any shortcomings or not.
Moreover, it will provide a good image to the lenders as well, as they want to see a track record before processing money. Therefore, just by subtracting and multiplying some numbers, you will get a picture of your firm’s proceedings.