How to Calculate Year-Over-Year Variance


When management teams analyze a company's performance, they often use a type of variance report that compares financial statistics to see how they vary from one year against the performance of another, usually the current year. This type of report, called year-over-year (YoY) variance, is especially useful and insightful when comparing a time series of financial data. Analysts can quickly and clearly see changes in various business aspects with YoY analysis.

TL;DR (Too Long; Didn't Read)

To calculate year-over-year variance,simply subtract the new period data from the old, then divide your result by the old data to get a variance percentage.

Defining the Concept

YoY variance is a tool financial analysts use to measure changes over time, using simple math and a variety of numbers from a company's financial statements. The calculation looks at the change, or variance, in two values over time such as sales revenue or net income. This variance calculation becomes very useful when doing analysis on a few years of data, such as three consecutive years' worth of a company's performance. When you calculate year-over-year growth, the resulting variance can show whether sales have grown at an expected or targeted rate, if expenses are growing faster or slower than sales, and other useful information to manage and guide the company's financial decisions.

Other commonly used metrics in YoY variance calculations include SG&A, or selling, general and administrative expenses. Checking this variance between years shows how well a company has managed its expenses from one year to the next. Cost of Goods Sold (COGS) and EBITDA, or Earnings Before Interest Taxes Depreciation and Amortization, are also useful performance metrics to review in a YoY variance analysis.

How to Calculate Year Over Year Growth

To calculate a YoY variance, you can use a hand-held calculator, although you might find a spreadsheet program more efficient. To perform the calculation, select data from the two years under comparison. For example, if you want to calculate the variance in sales revenue, use the following formula:

YoY variance = (This year's sales - last year's sales) / last year's sales

For example, if you sold $10,000 worth of widgets last year and sales increased to $15,000 worth this year, you would calculate the variance as follows:

YoY variance = ($15,000 - $10,000) / $10,000 = .50, or 50 percent variance

The resulting variance, or change from one year to the next, might be positive, implying growth, or negative, which would imply a drop in either incoming revenue or outgoing expenses.

Interpreting the Year Over Year Calculation

The YoY calculation analysis provides a useful way to view changes over time because it quickly reveals certain business trends. Since you're comparing a full year's data, any variances between individual months become smoothed out. For example, even though your business does most of its sales right before holidays, this fluctuation, called seasonality, won't show in your variance calculation of yearly data.

In this case, you might find it useful to do a month-over-month variance calculation for each of the two years so you can take a deeper look at seasonal trends in addition to the YoY variances. You would perform the variance calculation on each month; for example the variance between January 2017 and January 2018, February 2017 versus February 2018, and so on.

Understanding the Basis for Calculation

When performing a YoY variance calculation, it's important to check that each set of data is generated on the same basis. Your yearly sales data, for example, could be from a company's last fiscal year, or it could be the company's latest historical, trailing twelve months' (TTM) worth of data, which might cover a different time period than the fiscal year data.

If the company does a huge business during Christmas, for example, and you're doing your analysis with a TTM income statement as of June 30, 2018, you would need a TTM income statement as of June 30, 2017, for equal comparison. You would get a different and less meaningful result if you compared your TTM data to information for the company's fiscal year, which ends on December 31.

Aside from being used to analyze company data, you'll find YoY variance analysis used to review other financial and economic metrics, such as trends in inflation rates, unemployment rates, interest rates and GDP, the country's gross domestic product.