What is an annual report?

Every small and medium business owner should compile an annual report at the end of the financial year.  The annual report provides details about the company’s financial position and operational activities during the year. An annual report provides shareholders with information about the industry in which the company operates, audited income statements, the financial position of the company, cash flow, and notes relative to income statements.

A comprehensive annual report gives stakeholders, potential donors and other interested parties information about the business, which they can use to make decisions.

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In order to provide accurate details about the financial status of the business, the information used to compile the report must be as accurate as possible. Errors made during the collection process or compilation of the report can substantially affect the viewpoint of shareholders and fuel funding concerns as well as affect management decisions. In this segment we explain how a report is written, how to avoid mistakes during data collection and provide encouragement on how to begin the process. 

What is included in the annual report?

The six basic components of an annual report are:

  1. The shareholder's letter
  2. General description of the industry
  3. Audited Income Statements
  4. Financial Position
  5. Cash Flow
  6. Explanatory notes

You may include brief additional sections, but it's generally recommended to adhere to these six basic sections This makes the report easier and less time-consuming to read and easier to understand at a glance. Aim for an inspiring, concise report that paints a positive picture of the status of company's finances. 

Planning the annual report

The success of every financial report begins in the planning stage. In this stage you consult and involve the planning committee to determine the data you need, who is responsible for collating and compiling income and expenditure reports, data on operations or information on accounting practices and requirements. It is important to include all the relevant information, without making the report too long or tedious to read. 

Remember: Shareholders and stakeholders are interested in finding out the results of your yearly operations. 

The tone of the report

Aim to include relevant information in an inspiring report. To do this you want to include meaningful results, not just long lists of data. Try to use the facts and figures included in the report to tell a story. At this stage you will want to develop a basic framework for the data, graphs, charts, predictions and photographs you want to include in the report.

How to write an annual report

What is included in the annual report?

1. The shareholder's letter

This vital communication is written by the CEO or manager of the business and its tone sets the mood for the entire report. Care should be taken to remain inspiring and positive and inject a hint of personality into this personal communication. 

2. General description of the industry

In this section you want to create a positive an inspiring picture of the industry as a whole.  Here, you should include numeric data about your market share as a player in the industry or positive predictions that indicate the upward trend in the growth of customer awareness of your business, positive reviews or regard and your networking among key players in the industry. In this section the aim should be to inspire optimism among major stakeholders. 

3. Audited statements of income

Income and expense reports should always be accurately audited before being presented to shareholders, financial institutions, and potential investors. This instils an air or reliability and confidence in the reader.  This section should include the annual income of the business, alongside the expense statements.  Financial statements can include balance sheets, income or profit and loss statements and a cash flow statement - they sum up the financial position of the business. 

4. Financial position

In this section you can make use of colorful charts and graphs to indicate the true financial position of the business. Stakeholders want to see that the business is generating income, minimizing expenses, turning a profit and planning the next financial year according to accurate financial information. 

5. Cash flow

Details about the ready, inflow of cash into the business will be of great importance to those reading your report. This section should relate to the section about income statements and refer to information and graphs noted in this section.  While the business may be rich in assets or potential profits, the cash flow is the total of finances being transferred in and out of a company's bank account during the financial year. This affects the liquidity of the business and is a true reflection of business stability. 

6. Notes to the statements for line items

Your financial statements may not be easy for individuals who are not directly involved in the business to understand. For this reason, all the financial statements need to include additional notes to clarify each or several facts and figures in the statements.

Pitfalls to avoid

When learning how to write an annual report, mistakes are inevitable. As already noted, making the report too long, confusing or tedious to read is a common mistake.

Tip: you want to stick to the shortest possible length, while providing ALL the relevant data. This data should be relevant to the particular stakeholders or potential donors you want to attract.  Including too many details and information about daily operations will result in boredom and doesn't get down to the basic results that the parties need to know.

Make sure to answer the following questions:

  • Why does the company exist?
  • What is the vision or objective of the business?
  • What is the strategy to reach this goal?
  • How does the company make money?
  • Online reports: What is included in the annual report?

These days many companies share their annual reports online. This is an effective way to reach many stakeholders at once and allow sharing of the document with interested parties in a network. While reports are similar to paper copies, online reports are an excellent way to get immediate feedback on your annual reports. By including an online feedback facility or response form, readers and shareholders can respond personally to the CEO, asking for more information, improved formatting or praising the content and structure of the report. So, don't forget to consider online cloud-based platforms and other online formats.

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Posted: 19 Aug, 2019

The Ageras authors don't provide any personal advice with regard to financial or fiscal matters - but accountants do. Fill in the form and receive non-binding quotes for professional tax advice.

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