A Guide to Annual Reports for Small Businesses
When many small business owners hear the term “annual report,” they either cringe at the thought of preparing one or shrug their shoulders and think it’s something only for corporations. While it is vital for corporations and nonprofits, every business can benefit from creating an annual report, whether it’s streamlined or robust.
Let’s look at what an annual report is, why it’s important, what the benefits are, and how this can apply to small businesses.
What is an Annual Report?
An annual report is a comprehensive document released by a corporation or non-profit at the end of the fiscal year to show its activities throughout the preceding year. Although not filed with the Securities and Exchange Committee, it is an integral part of the business’ operations. It is a large endeavor, but an important one. Large corporations and small charitable organizations need to communicate their activities and financial performance to vested parties–with corporations it’s to investors and shareholders and with non-profits it’s to board members and donors.
An annual report will generally contain, but is not limited to, a Director’s/CEO’s Report, Chairpersons’ Statement Letter to Shareholders and pictures of facilities, employees and products to help better know the company. Then, that is generally followed by the hard numbers, the financial statements. These include but, again, are not limited to Balance Sheet, Cash Flow Statement, Profit and Loss Report, along with notes to accompany the financial statements, an operating and financial review and an auditor’s report.
Significance, Function and Benefits
When it comes to corporations, the bottom line for many investors is just that, the bottom line. The annual report will show the investor how the company is faring financially and, for the most part, will help them ascertain if they’d like to continue investing in the company. There’s no way around the bottom line, but if the company is a start-up or underwent a dramatic change, then that will be clearly stated in the annual report. For a non-profit, the same can hold true as far as looking at cash flow, but donors and board members will also want to know where the cash flow went, so a comprehensive list of activities is crucial.
While annual reports can be weighty, coming in at more than 100 pages for some corporations, they generally don’t have to so massive. The function of this year-end report is to give key people, the business itself and its employees, a snapshot into the operations over the past year. For many investors, shareholders, board members and the like, time is of the essence, so laying this information out in a succinct way, where vital information isn’t hard to track down, is important. Often times, charts and graphs will be utilized to further show the information in an easy-to-grasp ways that is also pleasing to the eye.
Additionally, having all of this data in one place can shed a light on oversights, trends, progress or potential problems. Can you imagine how long it would take to track down all of this information if the investor had to do it on his own? Yes, it is for the sake of convenience of others, but even small businesses without investors can benefit from creating an annual report.
Why It’s Important for Every Business, Even Small Businesses
The annual report is an integral part of today’s business world, but every business can benefit from writing one, because it will help in the following ways:
1. Help redefine core strategies.
Businesses get caught up in doing business during the year. It’s hard to take a breather and assess how things are going beyond looking at the bank statement. Small businesses can use the process of creating an annual report to help redefine its core strategies, and ask: What are you doing really well and how? And what are we doing poorly and how can this change?
2. Use it to better understand its own business and place in the competitive landscape.
This is closely tied to number one, but with a shift in focus. A business can use an annual report as a catalyst for creating a yearly map of how it is operating in the competitive landscape. Who are your competitors? What strengths and weaknesses do you possess to grow your share of the market? When assessing the market, what are the opportunities and challenges?
3. Utilize to assess if yearly goals were met.
Hopefully every business sets goals, both financially as well as beyond, like with operational goals or human resource goals. If not, do it! An annual report can clearly show a business if its financial goals have been met, as well as how far a margin ahead (or behind) them it is.
4. Set goals for the coming year.
Use an annual report to set goals based off of last year’s productivity. This is vital if shareholders are involved, obviously, but will be of benefit internally for small business. Forecast and overcome!
5. Take it to the next level, before the next level.
Let’s say that you have launched a small tech start-up–maybe a company that makes smartphone apps and you are in your third year. Do you have plans to potentially grow and sell your company? Maybe you would be interested in having investors help you further grow your company. Whether that business plan is for 10 years, five years or one year, you will be ahead of the curve of having to write an annual report if you are already doing it. It shows that you are professional and have your business together.