An annual report is a key indicator of the success of a company, and critical to evaluating your investments—or securing new investors. A company’s annual report is usually more complex than a letter grade, but worth reading to get the full picture.
As we near year end, we’re giving you the context you need to understand forthcoming annual reports.
What is an annual report?
An annual report is a document for shareholders detailing the company’s performance over the past year.
The annual report communicates to shareholders (and even customers and employees) how the company has managed finances and business operations during the year. The Securities and Exchange Commission requires that annual reports be filed no later than 60 days after the end of the fiscal year. It communicates important information about shares, growth, and goals.
The goal of an annual report is to inform and assure shareholders, as well as to demonstrate strong business operations for potential investors who are evaluating the company.
There is no standardized format for an annual report. Some may be tomes of every meticulously gathered financial statement. Some are short infographic-style newsletters. Annual reports may also be leveraged for marketing purposes, communicating tone and brand.
Since the stock market crash of 1929, all public companies are required to file a Form 10-K for public disclosure of financial performance, and most will write an annual report to accompany it (more about this in a moment).
A good annual report includes the following:
- Honest communication
- Engaging presentation
- Clear profit-and-loss statements
- Executive compensation disclosure
- Context of the economy or industry as a whole
- Headings and organization for readability
What information is included in an annual report?
While a Form 10-K is a standardized report filed with the U.S. Securities and Exchange Committee, there is no regulated template for an annual report. Each company can create its annual report based on performance, need, interest, and audience.
An annual report generally includes these elements:
Letter from the CEO
Often an annual report will open with a letter from the CEO giving a brief overview of company finances, financial position, company’s activities, and performance of the preceding year. This letter is usually addressed to shareholders and provides context for the data included in the report. The CEO may also explain choices made by the company and provide updates on the industry, market, and competition.
Example: In 2016, the President and CEO of Graco wrote a letter as part of the annual report which admits and explains mistakes, as well as providing a window into company culture and decision-making.
Company information
General information about the company may be represented in tables or lists, or with infographics that illustrate the data for easier consumption. Of particular note are the income statement, balance sheet, cash flow statement, financial statement, employee count, and performance on yearly benchmarks or targets.
Example: Mailchimp’s dynamic annual report shares statistics in a fast and fun way.
Auditor’s report
An auditor will assess the financial realities and reporting to determine if the company is in compliance with generally accepted accounting practices (GAAP). An auditor’s report will assert the truthfulness and completeness of the annual report, or indicate that there is material and/or pervasive evidence of misstatement.
Example: The Bill & Melinda Gates Foundation provides audited financials alongside graphs and relevant organizational information each year as part of their annual report.
Marketing content
Annual reports can also serve important marketing and PR purposes, and might therefore include photos, videos, company highlights, and shareable content with a lighter tone.
Example: Flywheel’s 2015 annual report is a great example of a colorful, out-of-the-box annual report.
Why do investors care about annual reports?
Investors have the legal right to understand the dealings of the company in which they have invested. They expect to see a detailed report of the company’s performance and how their investments were used.
Investors want to see that their shareholder equity is protected, and that the company has shareholder success in mind. The annual report is the best way to feel the pulse of the business and to see where it might go next. Profitable data is encouraging, while loss and secrecy might signal troubled waters for investors.
Potential investors are looking to an annual report to see how shareholder-friendly and transparent the business is, and to look for any red flags. They’ll invest their money only after seeing a favorable annual report with clear communication of company status and goals.
Annual report vs. Form 10-K filing
An annual report is the general summary and forward-facing communication of complex company finances. A Form 10-K filing is a detailed compilation of all financial information created for the U.S. Securities & Exchange Commission.
All public companies are required by the SEC to file a Form 10-K each year. A Form 10-K is an exhaustive report of company finances, risk factors, management discussion and analysis (MD&A), properties, executive compensation, and other statistics. A Form 10-K is more detailed than an annual report and can be more difficult to read, but is vital for shareholders and potential investors for determining the state of the company. Public company filings are cataloged in the EDGAR repository.
It is recommended that you read both the annual reports and the Form 10-K filing for a company before investing or considering partnerships.
How to file an annual report
Nearly all companies are required by their state to file an annual report to remain legitimate; only publicly traded companies are required to file a Form 10-K with the SEC. Annual reports are beneficial for the company, shareholders, and potential investors alike, because the data and reflection can prove to be invaluable.
- Determine state requirements. If your business is a corporation, LLC, partnership, or nonprofit you’ll most likely have to file an annual report with your state—although it may be called something else (California’s is a “statement of information”). Your state may require yearly, biannually, or once a decade.
- Gather data. Some states merely require the names and addresses of the director and managers. If you intend to publish your annual report with more data for investors, employees, or customers, you may wish to gather more data regarding revenue, profits, growth, and goals.
- Create annual report. Complete any state forms, and pay any franchise taxes or business taxes required in your jurisdiction. Publicly traded companies need to complete the Form 10-K. For publicly shared annual reports, consider using a service or template to create visually appealing annual reports.
- Submit annual reports. Submit state forms online or via mail, and submit Form 10-K completions online to the SEC (tutorial here). Don’t forget to submit annual reports for each state in which you operate. Annual reports are usually published on your company website and can also be mailed or emailed to shareholders, customers, or employees.
We hope this arms you with the knowledge you need to properly read and assess the annual reports you see at the end of this fiscal year, as well as producing a useful annual report for your company.