Sign up to access the complete lesson and track your progress!
Unlock This CourseImagine you're tracking your pocket money over several months. You'd want to know if you're getting more or less than before, right? That's exactly what businesses do with their accounts! Comparing financial performance with previous years helps business owners, investors and managers understand whether the company is doing better or worse than before.
This type of analysis is like having a financial time machine - it shows us the story of how a business has performed over time. By looking at patterns and trends, we can spot problems early and celebrate successes.
Key Definitions:
Year-on-year comparisons help businesses understand their performance trajectory. It's like checking your exam results term by term - you can see if you're improving, staying the same, or need to work harder. For businesses, this analysis reveals growth patterns, seasonal trends and the impact of strategic decisions.
There are several ways to compare financial data across years. Each method gives us different insights into business performance, just like using different lenses to examine the same object.
This is the simplest method - we just look at the actual pound difference between years. For example, if sales were £100,000 last year and £120,000 this year, the absolute change is £20,000 increase.
Track total income from sales year by year. An increase usually indicates business growth, whilst a decrease might signal market problems or increased competition.
Monitor expenses like wages, rent and materials. Rising costs aren't always bad if revenue increases more, but they need careful watching.
The bottom line! Profit changes show the overall financial health. Even if revenue grows, profit might fall if costs rise faster.
Percentage changes are often more useful than absolute changes because they show the relative size of change. A £10,000 increase means different things to a corner shop versus a multinational company!
The formula is: ((New Value - Old Value) ÷ Old Value) × 100
Year 1 Revenue: £50,000
Year 2 Revenue: £75,000
Calculation: ((75,000 - 50,000) ÷ 50,000) × 100 = 50% increase
Interpretation: TechStart's revenue grew by half in just one year - excellent growth!
Different percentage changes tell different stories:
Looking at just two years can be misleading. Smart analysts examine trends over three to five years to get a clearer picture of business performance.
Consistent growth over several years suggests a healthy business model. Erratic changes might indicate external factors or management issues. Seasonal businesses need to compare the same periods across different years.
Businesses typically show one of several trend patterns:
Steady increases year-on-year. This is what most businesses aim for, showing expansion and success in the market.
Consistent decreases that might indicate market problems, poor management, or increased competition requiring urgent action.
Regular ups and downs, often linked to economic cycles or seasonal factors like holiday sales or summer tourism.
Year-on-year comparisons aren't just academic exercises - they drive real business decisions that affect jobs, investments and company futures.
Investors use comparative analysis to decide whether to put money into a business. Consistent growth trends attract investment, whilst declining trends raise red flags.
GreenGrocer Ltd showed the following profit trends:
Year 1: £25,000
Year 2: £30,000 (20% increase)
Year 3: £42,000 (40% increase)
Year 4: £38,000 (10% decrease)
Analysis: Strong growth for three years, then a decline. Investors would want to understand what caused Year 4's drop before investing further.
Managers use year-on-year comparisons to set budgets, plan staffing and make strategic decisions. If costs are rising faster than revenue, they need to act quickly.
Whilst year-on-year comparisons are powerful tools, they have limitations that smart analysts always consider.
Economic conditions, natural disasters, or global events (like pandemics) can dramatically affect comparisons. A restaurant's 2020 performance shouldn't be compared normally to 2019 due to COVID-19 lockdowns.
1. Always compare like with like (same time periods)
2. Look for explanations behind significant changes
3. Consider external economic factors
4. Use multiple years for trend analysis
5. Combine with other analysis methods for complete picture
The key to effective year-on-year analysis is asking the right questions and understanding what the numbers really mean for the business.
When analysing year-on-year changes, consider:
Growing revenue, controlled costs, increasing profit margins and positive cash flow trends all indicate business success.
Declining sales, rising costs faster than revenue, shrinking profit margins, or negative cash flow require immediate attention.
Sudden changes, unusual patterns, or results that don't match expectations need deeper investigation to understand causes.