Businesses have a lot of metrics available. So many you could lose days, possibly weeks scrutinising any number of metrics and analysing what they really mean. The bottom line of how successful or not your business is can be determined by Key Performance Indicators (KPIs).
The one KPI that matters are your Year-on-Year (YoY) growth.
It is more powerful than your monthly metrics because it takes into account seasonal factors. For that reason, businesses in their first year of trading are at a distinct disadvantage because they need to effectively guess how potential seasonal trends will affect their trading.
Seasonal trends differ by sector. Landscapers are busier in the good weather; retailers see an uptick in orders during holidays. Analysing your financials monthly can lead you to believe you are experiencing massive growth, but it does not matter if the spike in orders drops back to normal lower levels the following month. Looking over the year, which is what YoY growth measures, eliminates the seasonal spikes.
The following year, the monthly metrics matter when looked at collectively. You can better forecast when orders will increase, and when to budget for dry spells, which is the time to divert energy and expenditure in marketing to ensure that when sales can pick up again, your business is primed to raise more orders than the same month in the previous year.
Period comparisons are where it matters
Many a business owner gets confused about cash projections, wondering how companies can seem to predict with precision what the sales forecast will be in a month, a quarter, or the entire year to follow.
It is done by comparing the same months from previous years. That is why the YoY KPI metric matters.
You need to be able to compare your monthly sales figures to the same period as the year before. Otherwise, you could mistakenly see a 35% increase in March, then do an April quarterly forecast projection based on recurring sales increases. Looking back to the same month the previous year, your financial data could show that you had a 50% sales growth last year, representing an actual 15% decrease in sales performance this year on a YoY basis.
That time spent doing a quarterly financial projection would be utterly wasted and end in bitter disappointment.
How to work out your business’ YoY KPI
To use an example, if in January last year your total revenue was £6,000, then the following January it increased to £7,000, that would be a £1,000 increase in revenue. As a percentage, that would indicate a 16.7% monthly sales growth for January.
To work out the difference in percentages, subtract the current year’s revenue by last year’s to work out the difference in profits (or losses), divide the difference by last year’s revenue, and then multiply by 100.
1,000 / 6,000 x 100 = 16.7% (rounded)
Keep in mind that measuring only the revenue does not account for expenditure. If you were to add advertising costs into the mix, those need to be included too for your own measurements of growth, otherwise, you’d be seeing net revenue growth, but missing out on gross revenue.
Which method you use depends on what you need. If, for example, it is for a business loan application, showing potential lenders your YoY growth as a percentage of net revenue can be useful to show that your business has the potential to ramp up sales, with a cash injection to increase advertising spend. As an exit strategy though, investors would likely want to see YoY growth in gross revenue, otherwise, huge marketing spending to increase sales would give a false representation of the business’s actual financial position. Revenue isn’t the same as profit.