How to Write an Annual Financial Report | Small Business - Chron.com

Zach Lazzari

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How to Write an Annual Financial Report

ByZach LazzariUpdated May 14, 2019

The annual financial report is a major event used to recount the success, failures and general trends from the previous year. The report is easily customized to reflect the business culture and audience. Some reports are very direct while others incorporate creative designs and custom elements. Regardless, the financials are a major element in every annual report, because they show the true earnings and vital signs from the entire business year.

Elements of an Annual Report

The report is designed to show the earnings, investments and important figures from the year but it should also tell a story and share a big picture vision for the company. Writing the financial aspect of the annual report is the most intensive segment – as it requires verification from accounting – along with preparing financial statements relevant to the business.

In some cases, this might be fairly straightforward – but a large corporation that has layers of investments and multiple departments – requires significant time investment and a team of writers and accountants that can pull everything into a tangible, legible format.

Beyond the financial reporting, an annual report might include a letter from the CEO, profiles and accomplishments from key personnel, such as the Chief Financial Officer and the managerial or executive team. Case studies from the year are not uncommon, since achievements and highlights, charitable giving and future outlooks based on projections and strategy are usual elements of the overall report.

Some businesses settle for the annual financial report as a standalone document - but incorporating more elements can help paint a nice picture of the company, its culture and its leadership.

Write a Clear Mission Statement

Lead with a mission statement to clarify the objectives of the business and of the business model itself. This serves readers who are not entirely familiar with the company but who may have interest in investing and gaining a stake in the business.

In the mission statement, include the big-picture elements of the company, while keeping the statement to two to three paragraphs in length. Why does the company exist and what purpose does it serve? How does the company operate and make money?

Specifics are important in the mission statement. Take the extraction industry as an example. One company will focus on extracting oil with a drilling well, while another extracts oil from sand. A natural gas company using fracking techniques sits in an emerging technology market, whereas a traditional natural gas model extracts from known gas reserves in the earth.

The investor perspective sees more risk and more potential gains from an emerging technology, but he might prefer the proven model for sustainable returns. The specific niche, technology and position within the market should be clearly defined int he mission statement.

TOC and Executive Summary

Navigating a large annual report that does not have a table of contents is difficult. Make a clear outline of each section with the corresponding page numbers. In a digital format, incorporating the ability to click on a specific element within the table of contents to jump ahead is a valuable time saver. This allows the reader to quickly access desired information, without blindly scrolling or thumbing through bulk pages.

After the table of contents, add an executive summary with only the key figures. Show the final results for earnings, growth, investments, charitable contributions and anything important. This single-page summary shows the key takeaways in a single, easy-to-read page.

For example, it might show $10 million in revenue with 5 percent growth over the previous year and $1 million in equitable assets purchased. With that information, the reader already knows the big picture numbers – and the reader can choose to explore the cause and effect, if desired.

Key Financial Metrics

The annual accounts preparation includes everything relevant during the year. The total earnings is an important figure, but strategies are often deployed for long-term growth that will reduce the immediate yield. Demonstrating the long-term plan for growth based on these strategies is important to build shareholder confidence in sustainable returns.

The key financial metrics to show include the financial balance sheet, income statement and the cash flow statement. The balance sheet reconciles cash and outstanding invoices against all liabilities. The liabilities include outstanding invoices from the year, debts and the company net worth.

The balance sheet numbers are often in the negative, because they show the balance, which includes mortgages and major debts. This is not a point of concern, and adding the balance sheet from the previous three years works well – as a point of reference – when it shows that the balance on debts and investments are decreasing alongside of a net worth growth.

However, the income statement is notable – ideally, it reflects a positive number and year-over-year growth. The income statement is written as a profit and loss report that calculates billables against expenses to show the net income for the entire year. Write this statement with the revenue in the left column and the expenditures in the right column. Subtract expenditures from revenue to show the total across the year.

The last critical element of the financial section is the cash-flow statement. This shows the money spent on taxes, interest payments and capital investments like equipment and real estate. It shows the values on those capital investments for both money spent and money gained from selling. Additionally, it shows all of the money that came into the business. The cash flow statement is important to show the value and strategy behind investments.

Create Intelligent Graphics

Writing the annual financial report comes with a heap of numbers. The average reader will struggle to interpret and analyze the large amount of raw data. Graphics are critical and they help highlight the data in a visually enticing format.

Create flow charts and pie charts to clearly show the earnings across each quarter. Add historic reports, especially when the current financial reports show growth trends. These serve to prove successful strategies.

Add arrows, sidebars and highlights to draw attention to key components in the report. For example, you might show how a drop in cash-flow during Q2 occurred after a major equipment investment then show the earnings report for Q3 and Q4 to show where the investment added revenue.

The graphics are powerful, and they help engage the reader in a less time-consuming format. This is especially important for busy shareholders who really want to see the nuts and bolts without analyzing every expenditure across the year.

Interpreting the Data

The graphics will help interpret data but writing the report requires language to help clarify the key takeaways. When writing an annual financial report and designing graphics, break out the numbers by quarter with a final annual statement. This helps show how things evolved across the entire year, while also creating manageable chunks of data.

The quarterly review also opens the door to analysis against shorter periods of time. This helps when attempting to show cause and effect for earnings across the year. For example, Q1 was slow, so the company hired a new sales director and by Q3, the decision showed the payoff with a major increase in revenue across the remainder of the year.

If the cause and effects of specific decisions are notable within shorter windows of time, you can create a narrow breakdown or you can draw attention to those specific periods of time on the quarterly charts.

The Strategy Section

This section is optional – and in some cases, omitting the strategy is important for protecting sensitive information, such as your financial business plan. Consider the audience before writing a report that spills trade secrets and long-term vision. The competition does not need to know your playbook.

In some cases, however, showing your strategies alongside of your results is productive. This analysis works to show the good and bad aspects of strategy, and it serves as a productive template for future decision-making processes. The ability to note a poor decision and pivot to achieve a better result shows a responsive and adaptive business.

The strategy section can also serve to show what is expected for the new year. If one or more tactics are proven revenue drivers, refining and expanding those concepts for the new year is worth noting in this section. If sharing strategies is not appropriate, you can still write this section as a separate document for internal use only.

Future Projection Analysis

Another optional section in the annual report is a future projection analysis based on historic financial reports. Dissecting multiple years of reports to analyze and uncover trends will help set projections for the following year.

In order to make accurate predictions, a solid baseline of historic reports is absolutely essential, as this practice is a function of statistics. More data lends to better reporting. Use at least three to five years of historic financials to build projections.

Projections Based on Earnings Trends

Projections are based on trends against quarterly and annual earnings. Adding value based on assets and then appreciating for items such as real estate, also shows what the future value of the business will be.

For example, a continually reduced mortgage against an appreciable piece of real estate is used to show how value increases for that specific property, based on market trends. If the average value for a commercial property increases at .5 % annually, weigh that against the decreasing liability to show the value for the following year.

Combine the assets from cash flow statements and place them alongside revenue trends averaged across multiple years to show where the business is moving.

Edit, Edit and Edit Again

After the report is written, designed and formatted for print and digital use, the tedious task of editing must begin. Start with a round of financial report editing. Double check every figure against the finalized reports to ensure that every number is accurate.

Next, run through the text for basic grammatical errors. Make the appropriate corrections before making a second sweep through the document for language and rewrites. The annual report has little room for obscurity, and everything must have accurate language that reflects the numbers. A cut-and-dry style is appropriate outside of company culture articles and case studies.

After finalizing the text, run through the numbers again for accuracy. Send the final draft to your accounting department for review and approval on all financial claims. Then, send it off to the CEO and to any outside review sources to make final changes to the text and graphics. After the document is thoroughly reviewed, save the final draft and prepare it for presentation.

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