A successful business owner needs to know what drives the business’s bottom line and must use the raw data input into QuickBooks (or other accounting software) to generate the essential reports needed to understand its business levers.
But which reports give you the most valuable data? (Hint: It’s not the one you think it is.)
Most business owners keep a close eye on their month-over-month reports (MoM), which shows the change in the value of a specific metric as a percentage of the previous month’s value. For example, if your business’s revenue MoM shows that your business made $5,000 in February and $6,000 in March that would be a 20% MoM growth.
A 20% growth is a sizeable jump and likely makes for a happy business owner. But, what will April’s MoM look like? If that same business primarily focuses on the sale and repair of ski equipment, then we’re guessing that growth starts to drop off dramatically in April.
That’s the problem with relying on MoM reports; they provide just a small snapshot in time, which could be positively or negatively affected by a number of factors. Events such as elections and change in governments, dips in the economy, natural disasters, seasonal sales surges or slowdowns or even something as simple as a calendar month with additional working days can all influence the bottom line on a MoM report.
A more reliable way to understand your business levers and how they affect growth (or lack thereof) is to analyze year-over-year (YoY) reports. A YoY incorporates an entire year’s worth of data in comparison with the previous year rather than simply comparing one month to the next. This provides a far clearer long-term growth picture, including what’s driving the growth and the external influences on the growth. A YoY report also gives a clearer picture of a business that is failing to grow.
A YoY report takes into account seasonal slowdowns, surges, variations in the economy and overall consumer habits allowing you to analyze the trends and patterns that affect the business at a macro level. Rather than focusing on small variation or blips in a MoM report, you’re focusing on big picture economic and consumer shifts.
The biggest advantage to using YoY reports rather than MoM reports is that when you spot a trend, you can ask yourself why it exists. Why did sales plateau in April and surge in August? Or, why is there a blip in June? It’s important to dig deep to find the answers to those questions so that you can adjust your big picture strategies and processes in the coming year to capitalize on overall shifts and to better ride out blips and variations.
This is how YoY reports make your business better and stronger; this is how your business stays ahead of the game and ahead of your competition.