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Annual Reports: Not Just for Large Operations

Reviewing the past year in-depth is an exercise in company ownership and management.

March is a busy time of the year for corporate business. Taxes have to be filed, annual corporate fees are renewed, and so on. Also during March, many publicly held companies issue their annual reports. And while the latter are often perceived as being geared only to public or very large companies, the fact is that all businesses"?small as well as large"?can benefit from generating an annual report.

Reviewing your past business year in-depth, and then writing about it is an excellent exercise for your company's ownership and management. In addition, your annual report becomes an interesting read for your employees and followers of your business "?key suppliers, bankers, attorneys, friends, relatives, etc. Regardless of who reads your annual report, the process itself is one of the most valuable things you can do to help identify where you stand as a business.

Five sections
Let's get into the nuts and bolts of what your annual report might look like. To make it simple, you can segment your annual report into the following five general sections:

  • Letter to shareholders: gives the president, CEO, or chairman of the board an opportunity to write a formal statement about the company's performance this past year. In this case, you may be writing the letter to yourself as the "shareholder," but that doesn't matter; write the letter as if you are reporting to a group of shareholders or investors. Be honest in your written assessment of both the negative and the positive experiences. Share the vision of your overall corporate plans and how you'll improve on your weaknesses and perpetuate your strengths.
  • Financial summary: provides a narrative of the financial results of the business. Discuss specifics about your revenues and expenses. Write about areas where the company succeeded in gaining revenues or cutting expenses. Identify the strengths and weaknesses in your financial picture. Is your short-term debt too high? What is your debt-to-equity ratio, and has it improved or worsened during the year? Did you have any extraordinary gains or losses? How much interest did you pay? What did the cash-flow picture look like? Identify goals for the upcoming year for your profitability ratios. Answering questions like these will provide you with a great perspective on the past year, as well as some vision of where to go for the next year.
  • Analysis of company operations: where you provide details of your company's operational aspects and the past year's operational results. Again, include the good and the bad, your strengths and weaknesses. Present information about your plant"?is it an advantage or disadvantage to your current business? Discuss your equipment"?did you add new equipment, or retire any old equipment? You might choose to include specifics on what new equipment you're planning to purchase.

This also can be an appropriate place to write about your marketing plan from last year: Was it a success, or did you ,in fact, struggle on the marketing side of your business? What new markets were you able to penetrate? Did you pick up market share in certain areas of your product line, or lose market share in another? Introduce your marketing goals for the coming year. Discuss key vendor relationships, banking relationships, and any other pertinent items.

  • Financial statements: the heart of the report"?after all, an annual report without financial statements wouldn't really be too useful. You can elect to provide detailed financials or offer more consolidated data, depending on how much information you wish to provide the readers. When compiling your financial statements, stick as close to generally accepted accounting principles (GAAP) as possible, providing more credibility to your financial statements. You can get creative in other sections of your annual report, but this section should be presented in a very professional manner.
  • Miscellaneous information: the last part of your annual report, an optional section where you can write about anything else you want to present. For instance, you can discuss your business plan for the past year and how you performed, and you can share your business plan for the upcoming year. You might choose to include photos and a brief description of some of the major projects you completed in the past 12 months.

A better perspective
Remember, this is your annual report, so write about what you want. Be creative, and don't hesitate to make your report interesting. Get copies of other annual reports from some large publicly traded companies and use some of their ideas. Also remember to be honest in your review. As you reflect on the past year and write about both the good and the bad, you will find yourself with a much better perspective on how to improve your business for this year.

Marty McGhie (marty@ferraricolor.com) is VP finance/ operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.

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