What Is the Purpose of Company Annual Reports?

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Bleary-eyed executives and financial employees surrounded by half-consumed cups of cold coffee may very well be working on their company's annual report. The importance of annual reports cannot be overstated. They are state-of-the-company snapshots taken at the same time each year — usually on the anniversary of the business's founding — and submitted to state governments, sometimes the Securities and Exchange Commission (SEC) and individuals and entities who have a financial stake in the company, work with the business in some way or are simply interested parties. When compared against previous years' annual reports, the company's growth and financial stability become clear.

TL;DR (Too Long; Didn't Read)

An annual report describes the company's financial position to shareholders. It exists to provide transparency into the company's financial position.

Understanding Objectives of Annual Report

By their nature, annual reports include a company's financial information for the year just passed, and usually at least two years before that for the sake of comparison. But annual reports also have additional purposes, including:

Meeting legal requirements:​ For publicly traded companies — those who sell shares of company stock to the public — the most important objective of their annual reports is to meet the SEC requirement that they file a financial report annually with the commission. Most states also require businesses to file an annual report, though it may be just a simple form. Some states, like New York, Nebraska, and Indiana, require filing every two years. Pennsylvania only requires filing every 10 years. Other states require corporations to file except for LLCs.

Keeping shareholders informed:​ Annual reports are written with shareholders, investors/potential investors and other stakeholders in mind as well as individuals who might be interested such as employees and the community.

Implementing as a marketing tool:​ Some companies use their annual reports to show others not only financial information, but also the type of company they are. They typically do this by including positive, uplifting stories about activities and accomplishments done in the past year. You've probably received annual reports from your local hospital with articles about new treatments and procedures, staff pioneering techniques or reaching milestones and maybe even patients from the community. Small companies can take this approach, too, even if on a much smaller scale such as a four-page, newsletter-style self-mailer.

Considering Annual Report Contents

Annual report contents vary depending on the type of company, who the report is targeted to and the available budget. For example, if you want to include some stories about what's going on at your business, your budget will dictate how many pages your annual report can be, what type of paper you can use and how many you can afford to print and mail.

But you'll also need to budget employee time to decide on the stories to tell, interview the employees or customers involved, take photos and write the stories. If you don't have someone with the skills and time to do this, you'll need to hire a freelance writer-photographer or marketing agency to do it for you.

It's also standard to include in an annual report:

  • A ​short description of your company​, its industry and the type of business it was involved in over the past year for those who aren't as familiar with your business.

  • A list of ​names of CEO, president, board of directors​ (including their titles and the companies they work for).

  • Letters from top executives​, introducing the report and summarizing what readers will find in it. To save space, it can be one letter signed by several people, usually a maximum of four.

  • Financial statements:​ Income Statement of earnings, Balance Sheet with assets and liabilities, and the Cash Flow Statement explaining cash coming in and how it was used. These are accompanied by Notes to the Financial Statement, where you explain any items that need clarification.

  • Management's Discussion and Analysis (MD&A)​ of the company's financial position compared with the prior two years.