An annual report of a company: definition and importance

By Indeed Editorial Team

Published 8 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses use various types of documents to communicate information to shareholders and investors. The annual report is one of these documents, which informs interested parties of the company's financial and organisational progress. Understanding the importance of this document is essential when you want to become a shareholder of any company or learn how to use it to assess a business's financial health. In this article, we explain what's an annual report of a company, discuss its importance and list the key components of a company's annual report.

What is an annual report of a company?

An annual report of a company is a document that reports the company's operational and financial information for the year. Issuing a report of this type is obligatory for public companies, as it allows them to inform their stakeholders and investors about the businesses' performance that year. Creating and sharing their annual reports helps companies make their finances and operations transparent, for example, to attract potential investors. Many businesses choose to make their annual reports public by uploading them to their official websites.

Related: How to write a business report (with types and an example)

Why annual company reports are important

Creating an annual report is one of the most effective ways for companies to communicate any important information to shareholders, employees and even customers. It provides them with vital information about the company's finances, significant accomplishments and outlook for future years. Here's how the three groups of recipients can benefit from reviewing the annual report:

Shareholders

The primary recipients of a company's annual report are its shareholders and any potential investors that may want to become its shareholders. They use the report to better understand what happened within a company during a year, including if it managed to improve its position within the market. Shareholders then use this information to make further investing decisions. When it comes to potential investors, they find this information useful because it helps them decide if they want to purchase a company's stock.

Employees

Sometimes it's also important for employees to have access to a company's annual report. They use it to better understand an organisation's focus areas and plans for the future. It's also not uncommon for employees to be a company's shareholders, as the employer may offer them stock options in a form of employee benefits.

Customers

Many customers use annual reports to better understand a company that they want to build a relationship with. This is especially common for customers who want to build B2B (business-to-business) relationships with a company, as it's important for them to work with high-quality suppliers or manufacturers. Even individual customers can use a company's annual report, for example, when they're considering hiring a construction company to build a home.

Key components of an annual company report

An annual company report is a highly organised strategic and financial document that the chairman, directors, managers and accountants create at the end of each year. Here's an overview of the key components of an annual report of a company:

Basic information about the company

Typically, the first page of any company's report features basic information about the business. This includes the company name, logo, location and management employees. Featuring this information is essential, as it allows investors or shareholders who work with multiple companies to quickly recognise the business.

Chairman's statement

The actual report usually starts with a letter from a chairman. In the letter, the chairman, who's usually the primary owner or the CEO, provides shareholders with a summary of what the company managed to achieve in the past year. It's a common practice for the chairman to give a brief overview of what the rest of the report contains and go into more details about the most important company events and accomplishments. For instance, it's essential that they mention any significant company initiatives, improvements and summarise the company's financial situation and operations.

Related: Chairman vs. CEO: what's the difference between these roles?

Directors' report

A directors' report is a financial document that directors prepare at the end of each calendar year and include in a company's annual report. The purpose of it is better corporate transparency. It's one of the most important elements of an annual report that allows shareholders to understand if a company's finances are in good health and if the business still has the capacity to grow in the new year and beyond.

It's also common for directors to include information about how the company's doing within its market and if it can easily comply with financial regulations. For shareholders, it's essential to carefully go through the directors' report, as directors also often share their recommendations for dividends there. Having this information helps them make better investment decisions and hold the directors accountable if necessary.

Related: What is a dividend yield? (With FAQs and formula to use)

Profit and loss account

The profit and loss (P&L) account, also known as the income statement, is a document that outlines and summarises the revenue, costs and expenses that a company incurred in a fiscal year. An income statement can show either a profit or a loss that a company experienced. If a business ended a year with a profit, it usually pays that money to the shareholders. It's also common for directors to choose to invest a significant part of that money back in the company.

Balance sheet

A balance sheet is a document that reports on figures regarding a company's assets, liabilities or shareholder equity. Here's what the most important elements of a balance sheet represent:

  • Assets: Assets are all things that a company owns. It typically involves any buildings, vehicles, shares and even software.

  • Liabilities: Liabilities are all company debts and loans that the business hasn't paid yet. There are two main types of debts that companies can have, which include short and long-term liabilities.

  • Equity: Equity is the difference between a company's assets and debts. When the equity is positive, it means that the company's finances are in good health and that the business owns more than it owes.

Cash flow statement

A cash flow statement (CFS) is another financial statement that public corporations issue at the end of each fiscal year. It summarises the amount of cash and equivalents that enter and leave a company. Reviewing this information allows shareholders to understand how well a company generates cash.

Notes to the accounts

Notes to the accounts comment on the financial information that the income statement, balance sheet and cash flow statement present. This element of a company's annual report provides additional information and clarifies various accounting processes that a company uses. In other words, it explains how a company calculated the numbers in its financial statement.

Auditors' report

An auditors' report is a letter from an auditor in which they share their opinion on a company's financial statements. Most importantly, it explains if a company's finances comply with general accounting principles and regulations. Typically, large corporations use external auditors to provide this element of their annual report. This improves the report's credibility in case a company wants to, for example, take a bank loan.

Related: Auditor skills for ensuring financial accuracy and transparency

Strategic report

A strategic report provides the readers of the annual report with information about the company's strategic operations, including the principal risks it faces. It serves as a tool that allows shareholders to clearly understand the development, performance or position of the business within the market. To create their strategic reports, companies typically use financial and non-financial key performance indicators (KPIs). Some companies choose to present the strategic report to shareholders instead of sending them the entire annual report. If that's the case, it's essential to inform the shareholders that the full annual report is still available to them upon request.

Related: What is strategic management and why is it important?

Corporate governance statement

A corporate governance statement focuses on the rules, practices and processes that directors and other executives use to direct and control a company. It focuses on the areas of environmental awareness, ethics, corporate strategy, compensation and risk management. To create this element of a company's annual report, it's necessary to conduct a review of the company's governance arrangements and develop an action plan to address any significant issues that the company faces.

Directors' remuneration report

A directors' remuneration report explains how much the company paid its directors during a fiscal year. It also clarifies any policies that it wants to implement in the upcoming year. This remuneration report usually lists fees, salary, use of company property or other benefits that directors received.

Explore more articles