What is an Annual Report?
An annual report is a published paper that publicly-traded companies release to make sure their shareholders are up-to-date on their financial state of affairs.
For-profit companies, mutual funds, and nonprofit organizations release annual reports so that their supporters, investors, donors, and other stakeholders understand the current state of their finances.
Because public companies rely on investments from shareholders, the annual report of a for-profit company is usually much more focused on its financials. Annual reports are essential so that shareholders and people interested in investing know what general financial condition the company is in. Annual reports also include important details like audit statements (a report making sure money is handled correctly), cash flow statements (comparing money in versus money out), balance sheets (totaling a company’s assets and liabilities), total paid dividends (the money paid to shareholders) and an analysis of performance over the previous year. Annual reports compare the current year’s performance to the prior annual report in order to document growth – Because what do businesses crave more than that? Lastly, annual reports list a company’s chief officers, executive team, and key staff members so that readers know who is making a company’s most important decisions.
You can think of an annual report as a professional version of the family holiday newsletter. Have you ever received a year-end letter from the cousin you don’t see much anymore, but still want to keep up with? An annual report is like that, except with a (very) heavy emphasis on your cousin's income.
The company iRobot, founded by three MIT engineers who liked making robots for space exploration, put out its 2018 annual report to stockholders in April. It included significant changes to staff and board, plus a “skills matrix” to show how diverse the company’s decision-makers were.
Source: iRobot 2018 Annual Report
Annual reports are like a diary...
If diaries came with bar graphs, pie charts, a balance sheet, and income statements. But unlike a diary, businesses know people will be reading their annual reports.
Annual reports work to show a clear picture of where their company shines, based on historical data. While annual reports are meant to make people trust the company’s future, they don’t forecast or predict future performance. That’s the investor’s job after interpreting the numbers. Annual reports make it possible to inform interested investors, attract invested donors, and document a company’s history with a clear path forward.
Every annual report is different, but they all share a few things in common. For starters, most annual reports kick things off with a letter to shareholders from the CEO. It’s a once-a-year chance for them to pull back the curtain, talk about their company’s challenges and successes, and give some insight into what makes their business run. After the CEO’s letter, things start to get real mathematical, real fast.
A publicly-traded company is a company that sells its shares on the stock market for the public to buy and sell for profit. The Security and Exchange Commission (SEC) requires that all publicly-traded companies make their financial information available to shareholders or anyone thinking of investing in them.
Imagine if your three best friends loaned you $10,000 to start a business. Every decision, expense, and budget item in your life would be up for scrutiny because you knew you’d have to pay them back with interest.
It’s no different when it comes to companies. When public companies rely on other people’s money to do their business, they have to answer to a lot of people! Annual reports help investors continue making informed decisions about whether or not they think a company will be viable in 5–10 years and therefore worthy of their continued investment.
By looking at historical annual reports, an investor can measure how much a company has grown over the years. Interpreting this information helps an investor make predictions about how successful a company will be in the future.
Annual reports can usually be found on a company’s website, but sometimes you have to do some digging. A good place to start is the “about” section, but if you don’t see one, you can always look at the website’s site map for company information. Most companies have an archive of all its annual reports. You can usually download it to your computer or device in the form of a PDF.
For public companies and mutual funds, you can also access a database of annual reports by going to the SEC’s website.
You might be thinking that corporate annual reports make sense, but what does the annual report for a mutual fund include? In many ways, there are no differences between the two kinds of annual reports. Both are meant to document and prove financial performance. But mutual fund reports tend to be less colorful and more straightforward. Mutual fund reports tell it like it is, providing mostly numbers and fewer insights on what the numbers mean. Corporate annual reports, on the other hand, paint a much more comprehensive picture of what makes the company unique.
Going back to the example of iRobot – The report began with a letter from the company’s CEO to shareholders. A personal letter gives the executive team a chance to talk intimately and directly to the people who’ve invested in its company. The report also provided a break-down of skills and experience across the team, helping the reader know who is behind the company’s success and not just to what extent it is successful.
It takes a well-trained brain to interpret a mutual fund annual report. The report provides a hefty dose of multi-year data that include condensed financial statements, management information, executive salaries, and a table showing the fund’s historical returns.
Every annual report includes a report from the auditor. An auditor is a person who is certified to comb through a company’s financial records and determine whether money is being handled responsibly. Auditors look at timeliness of payments and payroll, how well-documented accounting records are, and how securely financial information is being processed, among other things. All of these findings are presented in an auditor’s report. They usually provide the company or organization with advice on how to handle their finances better, but these suggestions are not included in the annual report. That said – An auditor’s confirmation that the annual report conforms to Generally Accepted Accounting Principles is essential for earning shareholder support.
If you work for a company or nonprofit that releases an annual report, you will need to prepare for it by gathering the year’s financial records, auditor’s report, legal paperwork, past year cash statements, and records of financial performance.
The team in charge of preparing the annual report often works with copywriters and graphic designers. These creatives use Adobe products like Illustrator or Photoshop to create a colorful and informative document that’s often eye-catching enough to appeal to scrutinizing investors. Some templates are available in Windows or Pages that can help you get a start. It’s always a good idea to look at examples of other annual reports to get ideas about how to best present information.
Because annual reports put a big emphasis on financials, they would not be complete without a look at management. Most annual reports include, at the very least, a list of the leadership staff, also known as C-suite. You can think of “C” for “chief,” because these are the employees who are responsible for driving growth and guiding the team towards a shared vision. The Management Discussion and Analysis (MD&A) is the section inside a company’s annual report that looks specifically at how effective the executive staff truly is. Of course, this analysis is not part of the formal audit, but more of a statement on how it’s going.
Think of it this way: If management is doing its job, the proof will be in the numbers. An MD&A is a discussion of those numbers to help give a little bit of context. MD&As often, but not always, provide the resumes of key players, a “skill matrix”. This matrix outlines all the talents the leadership brings to the table and a list of agreements and procedures that the board of directors has approved to help them make the best decisions for the company.
Just like the SEC regulates the stock market, there are standards that help companies publish the most accurate and credible annual reports they can. These standards are established by the Financial Accounting Standards Board (FASB). FASB is a nonprofit regulatory organization that makes sure companies prepare their financial statements both clearly and honestly.
Even though annual reports are meant to show past performance and give relevant information about a company’s financial success, it wouldn’t be honest without a discussion of risk. Sometimes, risks are out of a company’s control, which is why it’s super important to talk about them. For an international company like iRobot, for example, risks involve foreign currency exchange and trade deals. The company touches on these risks in its annual report. It discusses, in pretty in-depth detail, how the board of directors plays a critical role in risk oversight.
Companies usually have a list of rules called “corporate governance policies” to make discussions about navigating sticky situations transparent and approachable. And, let’s be honest – these procedures are necessary for legal reasons, too, since risk is all about minimizing an entity’s exposure to liability. Sometimes, these things are out of a business’s control, but an annual report aims to be as honest as possible while presenting strategic ways to be successful. 20200103-1048585-3152886
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