Year-over-year performance – how do you measure it?
My experiences in fast-growing companies revealed a variety of ways people measure growth. The one that always gives me heartburn is year-over-year growth. It is frequently stated as a ratio of your current performance to same month or quarter in the previous year.
Here what makes this challenging:
- What happened last January? Any big customers wins? Or losses?
- Is your business seasonal? Did any business slip a month or two?
- Any economic shocks (think last October when everything stopped for a few days)
- How many days in that month again? (Yes, last February had 29 days)
Beware of these comparisons. I prefer measuring the change in the annualized or quarterly run rate. These numbers are less susceptible to one-time events and/or optimistic interpretation.
To quote a Wall St. friend, we live in a second derivative world. The change in the growth rate both thrills and scares people. I am suggesting that you look at the underlying numbers carefully and make sure they are not full of special factors that skew results. Most businesses have a natural rate of growth based on its core customers and markets. Talented managers can change the slope of the curve while pretenders manipulate the numbers. Be careful out there.