Investors must carefully analyze the financial health and performance of any business they consider funding. To do this, they turn to several financial statements that offer glimpses into the organization’s inner workings.
Few financial statements are more highly anticipated each year than a company’s annual report, which not only summarizes its performance for the preceding year but charts a course for the one ahead.
With this in mind, knowing how to prepare an annual report is essential for anyone interested in a leadership position. Whether you’re an aspiring entrepreneur, functional lead, or member of your organization’s C-suite, learning how to prepare an annual report can help advance your career.
Here’s a look at what an annual report is, its key components, and steps you should follow to create one.
What Is an Annual Report?
An annual report is a document that describes a company’s financial condition and business operations for the previous year.
Any publicly traded business is required by law to prepare and publish an annual report, which helps current and potential investors decide whether to provide funding.
Businesses not publicly traded can still prepare an annual report if they have private investors who must be apprised of their performance or are in the process of securing private funding.
Components of an Annual Report
An annual report typically consists of the following documents or sections:
- Letters to shareholders
- Management’s discussion and analysis (MD&A)
- General corporate information or business profile
- Operating and financing highlights
- Financial statements
Usually, an annual report is split into two halves. The first half contains the company’s narrative in the form of the letters to shareholders, management’s discussion and analysis, general corporate information, and operating highlights—all of which tell a story about how the company performed and worked toward its goals. The second half of the report strips out narrative components and presents data, which investors are encouraged to analyze to draw conclusions about the company.
How to Prepare an Annual Report
1. Compile the Business Profile
The business profile is the section of the annual report where you summarize key information about your business. It typically includes information about:
- Your company’s key products or services
- Your company’s mission and vision
- The board of directors and other business officers
- Your investor profile
- Your competition
- Opportunities and risks
- This section is also sometimes referred to as the general business information section of the annual report.
When writing this section, remember your goals: to quickly provide new, current, or potential investors the information needed to understand your business and industry.
2. Generate Key Financial Statements
The purpose of the annual report is to provide data and analysis regarding your company’s operations and financial performance. As such, the financial statements it contains are essential.
Important financial statements include your company’s:
- Income statement
- Cash flow statement
- Balance sheet
- Statement to shareholders
While you can compile the report’s other sections before generating financial statements, it’s best to avoid doing so because your letters to shareholders, management’s discussion and analysis, and other narrative elements should be backed by financial data. Not creating financial statements first makes it possible to tell an inaccurate or incomplete story you’ll later need to correct.
3. Select Operational and Financial Highlights
After generating financial statements, select highlights for your report’s narrative elements. Incorporate a mix of operational and financial highlights. Some examples include:
- The launch of new products or services
- The opening of new facilities
- Major contracts or partnerships
- News about mergers and acquisitions
- Rate of revenue growth
- Whether the company turned a profit or loss for the year
4. Write the Management Discussion and Analysis
While the financial statements included in the annual report allow investors and analysts to analyze your business, the management discussion and analysis section offers you and your team the opportunity to present an internal analysis of financial performance and statements.
The MD&A section also typically contains information regarding key issues your company faces, such as compliance with laws or regulations, systems and controls recently put in place, and new or emerging risks.
While the MD&A section is more subjective than financial statements, it must meet the standards set by the Financial Accounting Standards Board (FASB). This includes ensuring the MD&A is balanced, based on fact, and has both positive and negative information.
5. Write the Letter to Shareholders
The final step is to write the letter to shareholders. This letter is drafted by the CEO, chairperson, or company owner and offers a high-level overview of the business’s operating activities and finances for the previous year.
The letter to shareholders ultimately acts as the introduction to the entire annual report and is the first piece of information investors review. While each component of the annual report is essential, the letter to shareholders is one of the most important to get right.
(Courtesy Harvard Business School)