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Annual reports are a crucial component of running a business, even if you're not legally mandated to create them. While the process may seem daunting at first, crafting an annual report can be straightforward once you understand the key elements to include.
As finance professionals, having a comprehensive annual reporting guide can streamline the creation process and ensure you're hitting all the necessary points. That's why we've put together this detailed walkthrough to help explain annual reports and allow you to properly leverage their benefits for your organization.
What are Annual Reports?
An annual report is a document that outlines a business’s performance over the past yearas well as comparison results to previous years. While what is contained in annual reports may vary, most include information about a company's operations and financial health.
Finance teams are responsible for creating annual reports. They are also tasked with using the information they compile in these reports to help companies make informed financial decisions.
Once a company’s finance team completes the annual report, it is typically presented to shareholders at the annual shareholders' meeting. Additionally, companies will publicly post their annual reports to ensure accessibility for executives, employees, and other stakeholders.
What Types of Companies Are Required to Have Annual Reports?
Different companies create annual reports for various reasons. Publicly traded companies and mutual funds must conduct yearly reports on the state of their businesses and then share these reports with shareholders. Publicly traded companies must file annual reports with the Securities and Exchange Commission (SEC).
While nonprofits and small private businesses that are not publicly traded aren’t necessarily required to create annual reports, it’s wise for them to do so to inform their employees, customers, financial analysts, potential investors, and other key stakeholders about the state of their companies.
What is the Purpose of an Annual Report?
Annual reports are important because they serve as a communication tool for companies. Through annual reports, businesses can communicate their financial health, performance, and operations over the past year to stakeholders, customers, or internal teams. This transparent reporting promotes trust and builds credibility.
What Should a Good Annual Report Include?
Let’s take a look at some of the critical components that all effective annual reports should include.
1. Letter from CEO/Executive Summary
Include a letter from the CEO toward the beginning of a business annual report. This letter should address shareholders and provide a mini-summary of the company’s financial performance in the previous year and any other company information that may be of interest.
2. Corporate Information
Corporate information in an annual report includes the name and address of the company, the purpose of the business, the company’s directors and officers, and the company’s products and services. You should also include any other information that frames the identity and history of the organization.
3. Financial Statements
Financial statements are a major component of annual reports. Including them provides transparency, one of the most essential traits shareholders want from a business they plan to invest in.
All businesses should include income statements, balance sheets, and cash flow statements in their annual reports.
Income statements summarize company revenues, expenses, and profitability over the past year. Balance sheets provide a statement at the end of the fiscal year regarding company assets, liabilities, and shareholder equity. Cash flow statements show how much cash flows in and out of the company. Combined, all of this financial information helps provide a complete picture of an organization's financial health.
4. Overview of Operational Performance
Operational performance refers to descriptions of a company’s core operations, products, services, customers, and market positioning. Information on significant company milestones or completed goals is also included in the operational performance section of an annual report.
5. Management Discussion and Analysis
A business annual report's management discussion and analysis section summarizes the state of the business from a high-level management perspective. Here, company leaders might examine the organization’s financial performance data and take the time to discuss future plans based on current company trends.
6. Performance Highlights/Key Initiatives and Developments
Effective annual reports should include a section highlighting the company's key achievements in the past year. By highlighting significant company achievements, businesses will attract favorable attention from shareholders and instill confidence in company employees and customers.
Companies can highlight key achievements in this section, including special initiatives undertaken, goals reached, or awards received by the company or its employees. You can also include information on major product launches or company expansions into new markets.
7. Challenges and Risk Factors
Compelling annual reports don’t just discuss company highlights and achievements. They also mention the company's challenges in the past year.
Being forthcoming and transparent about financial and organizational challenges helps show that the company is open, honest, and trustworthy—all traits that shareholders and investors value. To ensure that your annual report shows the evolution of your organization and optimism about the future, you can also bring up how your company plans to overcome each challenge in the upcoming year.
It’s vital to also be transparent about business risk factors in an annual report. Examples of business risk factors include industry disruption, supply chain shortages, and any other possible future issues that could cause shareholders concern.
9. Environmental and Social Information
A well-rounded annual report should also include information on the company’s environmental and social practices regarding sustainability and ethical issues. To effectively report on company ESG (Environmental, Social, and Governance) practices, highlight the company policies and initiatives that comply with ESG requirements.
10. Corporate Governance
The “G” in ESG stands for governance. Just as it’s essential to include information on a company's environmental and social practices in an annual report, it’s also important to include information on the company’s corporate governance.
Discuss how the company is run to effectively provide information in an annual report on its corporate governance. For example, you can include details on the composition of the company’s board of directors and how the board enforces ethical principles and practices. You can also include details on the ethical principles and practices of the various leadership teams at your company.
11. Shareholder Information
Annual reports include information on shareholder meetings, voting procedures, and dividend payments. This will facilitate shareholders' participation in the company's decision-making process.
12. Legal Notices and Disclaimers
It’s vital that your annual reports comply with all legal requirements. This is especially true if you’re creating an annual report for a company mandated to have them. Some legal notices and disclaimers on annual reports may inform readers that the information included in the report is based on current conditions and known data. Others may clarify that the information in the report isn’t guaranteed to be absolute beyond the company’s financial records and that predictions made in the report aren’t assured outcomes.
13. Outlook and Future Plans
Another feature that effective annual reports have is information on the company’s future goals and initiatives. Good annual reports might even include information on how the company plans to implement its strategies in the near future. By providing such an outlook on the future, companies make it easier for investors to understand the company’s current position in the industry and how it plans to grow.
14. Appendices
Your annual report may need appendices. The appendices section of an annual report may include additional information or data, such as additional financial statements or supporting documents.
Annual Report Format Options
While most annual reports are in the form of electronic PDFs (given how easily they can be created and shared), there area variety of formatting options you can explore to present the information in a unique way.
Interactive Online Annual Reports
Now more than ever, people use the web to create interactive online annual reports. To make your online yearly report interactive, include plenty of dynamic graphs and charts to represent your data, along with clickable links and multimedia content.
Book-Length Document
Physical book-length documents contain a traditional annual report format as they were how most annual reports were initially formatted. Technology has changed that, though, as many companies have transitioned to using a more modern annual report format.
Large Postcard
Because even the largest postcards have little space, if you select this format for your annual report, you should highlight only the most important details. However, you can make your readers view the rest of the information in your postcard annual report by including a link or QR code to a site with the additional metrics.
Self-Mailer
Another format option for an annual report is a two- to four-page self-mailer. A self-mailer is material, often promotional, mailed without an envelope.
When using a self-mailer for your annual report information, it’s best once again to concisely highlight the most important details of the report. You should also incorporate multiple images and designate the next steps readers should take to gain further information on your company. This could mean having the URL to a website with additional metrics and data on your company’s financial situation.
Video
While it may not be the first thing that pops into your head when you think of an annual report, video can be a fun and innovative format. When creating an annual report in video format, pre-write a script that clearly states all the metrics and information of a typical annual report.
To maintain a professional and polished look, hiring a dedicated videographer and using quality equipment to film the annual report is best. Finally, make sure to use footage relevant to the points you're making in your annual report video.
Annual Reports Best Practices
Some best practices for creating annual reports include the following:
Incorporate Annual Report into Larger Strategy
If you have specific goals for your company, incorporate your annual reports into a larger strategy to achieve those goals. For example, if your goal is to attract investors, prioritize parts of the annual report that investors are most interested in. You can even talk directly to prospective investors in certain sections of an annual report.
Create a Narrative with Your Annual Reports
One of the best ways to increase the quality of your annual report is to create a narrative with it. In fact, according to a Deloitte study, the average yearly report today is 61% narrative.
Narratives have become invaluable in annual reporting because they provide authenticity and make your report more engaging and compelling.
Consider Your Audience and Speak Directly to Them
Another best practice when conducting annual reporting is considering your audience. Is your audience primarily stakeholders or internal employees? What are their demographics? Considering these questions can help your report receive more engagement.
To further engage your audience, talk directly to them. You can do this by using first and second voices in your annual report or prioritizing sections of the annual report that your audience values more.
Use Data Visualizations
Data visualization is a critical practice when creating annual reports. It can help readers more easily understand the financial data within them and make the report easier to read.
Use Fluence to Help You Master Annual Reporting as a Finance Professional
There are many components to an annual report that finance professionals must know how to conduct. For example, a company's financial statements are a significant component of any annual report. To learn how to prepare consolidated financial statements, consult the Fluence step-by-step financial statement guide here. To learn how to conduct other components of an annual report effectively, make use of the numerous other Fluence finance solutions and resources.
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