If you don’t tell your own story, your stakeholders will make up their own version of what happened in your business. You can tell your own story by writing your annual report.
The annual report describes what happened in the past year and what the plan is for the next year to shareholders, investors, analysts, and anyone else who wanted to read this important document.
The major sections of an annual report include the CEO’s message, financial statements and notes, management discussion and analysis, risk management, internal controls, and other reporting requirements (and maybe some photos of your employees and customers).
Even though you are not a public company, the discipline and process of preparing an annual report for your shareholders, investors, lenders, and even your major customers and suppliers, can be very beneficial to you. It’s your report card. But you get to write it yourself!
When you prepare an annual report, your stakeholders will see you as a more professionally managed company with more credibility. If you don’t have an annual report, your stakeholders may be guessing as to what happened in your business.
Wouldn’t you rather be the author of your own story?
The major components of an annual report include the following:
- CEO’s message — The CEO summarizes the major highlights from financial and operational perspectives. This includes economic insights about industries and geographies you serve. For example, the low oil price has decreased economic activity in Alberta but also reduced wage pressures and increased labor supply in neighboring provinces. This has also caused increased competition from distant competitors who are now seeking work outside of Alberta.
- Financial Highlights — In addition to the full financial statements and notes, you present summaries of key financial highlights and explain what happened and why. These highlights typically include revenue, net income, EBITDA (earnings before interest, income taxes, depreciation and amortization), and free cash flow. They also include balance sheet highlights such as working capital, asset totals, debt levels, and equity.
- Management Discussion and Analysis (MD&A) — This is a major part of the entire annual report and it includes an overview, key performance indicators, analysis of operations, liquidity and capital resources (your banker’s favorite), related party transactions, accounting estimates and policies, internal controls (this is a requirement of public companies), risk analysis, and an outlook for the future periods.
- Photos — Recognize your employees and customers by featuring them in your annual report. If a picture is worth a thousand words, photos are a great way to tell your story.
Let’s discuss a few of the MD&A sections…
Overview of Business Operations
This section discusses your business operations, types of products or services offered, geographic markets served, and other relevant information. It includes significant events such as acquisitions, divestitures, and major contracts with customers.
Key Performance Indicators
These discuss specific financial and operational metrics in detail and explain what happened. For example, you would discuss Revenue and EBITDA performance and all other major financial sections and the drivers of those results.
Analysis of Operations
This describes your business results by business unit or segment. You may have multiple product or service offerings provided to different industry customers in various geographic areas. This section slices and dices what is going on in your business.
In Outlook, you discuss what you see happening in the near future in your business units, including industry trends and economic impacts. You forecast your future financial performance (yes, that’s a scary idea) and outline your plans at a high level.
Challenges and Obstacles
A major challenge in mid-market companies, especially high growth companies, is that they are so busy with the day to day that they lack the time and resources to perform a detailed analysis of their own business. They just keep rowing harder without gathering internal intelligence along the way. And that’s too bad because they have gold buried in their internal information that may never be accessed until there is a crisis or an acquirer knocking on the door.
Discovering Your Gold
Can you imagine the types of decisions your managers could make if they had the information listed above available to them on a regular basis?
What could your business achieve when you have a detailed scorecard of your key business results?
The annual report, and the quarterly reports, aren’t just for external users. They are also highly useful for your senior management team to analyze where you’ve been and to make better decisions about where you are going. Your advantage is that you can keep this information internal and confidential because you’re a privately-held company. Yet you still benefit immensely from the analysis and planning.
What can you say in your annual report about your past performance and future plans? Would it strengthen your shareholders’ and bankers’ confidence in your business? Would it help your leaders make better decisions that would maximize shareholder value? Would it build your business wealth?
If you’d like to discuss how I can help you prepare your annual report so that you can tell your own story, please call me at 1-306-992-6177 or send me an email at [email protected].
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