Step-by-step how to create an annual report

For publicly listed companies, effectively crafted annual reports maintain transparency, build investor confidence and comply with standards set forth by the Australian Securities and Exchange Commission (ASIC) and the Australian Securities Exchange (ASX).

Smaller businesses and non-profits may also find value in preparing them.

In this article, we’ll outline some of the key considerations that help make annual reports not only professional and compliant but also meet stakeholder expectations and support the company’s strategic goals.

Step 1 – Prepare financial data

The foundation of any annual report is accurate and comprehensive financial data.

To start, assemble all relevant financial information such as the:

• Income statement.
• Statement of comprehensive income.
• Statement of changes in equity.
• Balance sheet, and
• Cash flow statement.

Step 2 – Determine objectives and KPIs

It is also important to first establish clear objectives. What do you hope to achieve with the annual report? Is your intent to attract new investors, provide transparency to existing shareholders or perhaps comply with regulatory requirements?

Annual reports are an ideal chance for businesses to emphasize their accomplishments and how those accomplishments connect with their broader strategy and mission.

In any case, clarifying your objectives is important since it will guide the content and tone of the report.

Your objectives will also determine which key performance indicators (KPIs) to focus on. Many incorporate financial KPIs such as revenue growth and profit margins, but it may also be useful to consider others such as customer satisfaction or environmental impact.

In fintech company Zip’s 2023 Annual Report, the focus KPIs are:

• Total transaction value (TTV).
• Active customers, and
• Revenue margin.

Step 3 – Finalise the structure

One of the more onerous aspects of crafting a financial report is knowing which information to include and which to leave out.

While structures vary from one business to the next, some of the more common elements include:

• An introduction or executive summary.
• General corporate information.
• Operating and financial achievements.
• Various financial statements (with notes).
• A shareholder letter from the CEO.
• Auditor’s report.
• Summary of financial data, and
• Accounting policies.

Consider the narrative

Much like the structure of a novel, the structure of an annual report is defined by a storyline that also shapes its content. With this in mind, it becomes much easier to identify information that moves the story forward and that which only detracts from it.

The content itself should be precise and clear and leave little room for interpretation. It should also be unbiased, honest and transparent such that it does not inflate successes or minimize losses or failures. The business should also demonstrate that it is aware of potential areas for improvement.

Step 4 – Create the executive summary

The executive summary is a brief overview of the annual report and enables time-poor readers to understand its essential information.

Executive summaries may include:

• The chair’s report or key points from the CEO.
• Overview of financial performance.
• Risks and challenges.
• Strategic vision and outlook.
• Investment and impact.
• How success is measured, and
• Major achievements and milestones.

The length of an executive summary depends on the size and nature of the company. Nevertheless, the objective is to provide a succinct summary that does not overwhelm the reader with detail or jargon.

Step 5 – Communicate the essential data

Communicating the right data encourages the right communication with investors, executives and other key stakeholders. In finance, information should be detailed and insightful such that it demonstrates:

• Effective budget planning.
• Appropriate risk assessment.
• Profitability, and
• Future returns.

A business in the B2B finance space, for example, could demonstrate that its profits consistently exceeded industry benchmarks.

Aside from showcasing the business’s robust performance and future growth potential, communicating the right type of data builds trust, transparency and confidence among investors and other interested parties.

In addition to financial milestones, it may also be wise to include operational highlights. This may encompass the signing of new major contracts, the opening of new facilities or news of recent mergers and acquisitions.

Step 6 – Include Management Discussion and Analysis (MD&A)

The Management Discussion and Analysis is a section in an annual report that addresses company performance. Note that the performance analysis is usually conducted internally by the company’s management and executives.

The MD&A is not audited externally and represents management commentary on what the company has achieved and where they believe it is headed. It can also include discussion on topics like compliance, risk, strategy, new projects and whatever actions it has taken to address challenges.

This section of an annual report represents an important source of information for analysts and investors. However, it should be noted that many publicly listed companies refrain from revealing too much about future strategy in public for competitive reasons.

Step 5 – Consider reporting requirements

Some information in an annual report is compulsory because of various statutory and regulatory requirements.

These requirements, which are explained in the Corporations Act 2001 and Australian Securities Exchange (ASX) Listing Rules, include:

• A corporate governance statement (or the URL of the company’s website where the statement is located).
• A financial report.
• A director’s report (which includes details of remuneration), and
• An auditor’s report on both the financial and remuneration reports.

Some aspects of an annual report are non-compulsory, but they nevertheless represent good corporate governance. Examples include corporate social responsibility (in the form of a CSR report) and sustainability-related reports.

A framework for the latter was introduced by the G20’s Task Force on Climate-related Financial Disclosure (TCFD) to establish consistent, climate-related financial disclosure for investors, lenders and the market.

Step 7 – Include a letter to shareholders

The letter to shareholders is an opportunity for the business to inform investors and other stakeholders about how it performed over the previous year.

The letter – which can also serve as a report in its own right – may provide details on financial results, achievements, obstacles, market conditions and a personal thanks to investors for their support.

In most cases, the letter to shareholders is written by one of the company’s top executives, such as the CEO, CFO or COO.

Take a look at JPMorgan Chase’s letter to shareholders from its 2023 annual report.

Other best practices

To conclude this how-to, let’s look at two best practices for crafting an annual report.

Ensure the report is aesthetically appealing

Annual reports do not need to win any design awards, but with a bit of effort, an attractive layout can serve as a marketing tool for the business.

The report itself should be uncluttered so that readers can scan through it and easily find the information they need. To that end, remember these pointers:

• Incorporate headings and subheadings.
• Keep sentences short and simple.
• Use text boxes, quotes and captions to highlight or emphasize key areas.
• Incorporate infographics, photographs and other visually compelling elements, and
• Use a colour scheme and layout that respects the business’s brand

Remember the target audience

Related to the objectives and overarching message of an annual report is the identification of the target audience.

It is important the business understands the target audience and their expectations. Investors, for example, may seek financial projections, while employees may read annual reports to clarify whether the business is acting in alignment with its mission or vision.

The above points ensure that the annual report speaks directly to the interests of the intended audience and avoids becoming bland or generic.

The ability to be compelling is especially important in finance.

In a survey conducted by EY Global Financial Accounting Advisory Services, 72% of respondents said finance teams were increasingly required to communicate how companies create long-term value for key investors and other stakeholders.

Summary:

• Annual reports facilitate transparency and accountability in Australian businesses for investors, employees, regulators and other key stakeholders. Publicly listed companies are legally required to file them, but other types of businesses may also benefit from releasing annual reports.
• Before creating an annual report, it is important to assemble important financial data as well as decide on KPIs and the story the report will tell. The latter will depend on the target audience and helps determine what information should be included and what should be omitted.
• The Management Discussion and Analysis is a section in an annual report that addresses company performance. Along with other details of a company’s achievements, it is often read by investors who want to buy into the company’s predicted trajectory.
• When crafting an annual report, it is worth considering certain design elements to make the information digestible and easy to find. It is also important to keep the interests of the target audience in mind at all times.