The Annual financial report is a comprehensive document released by businesses – whether large or small – at the end of the year to show their activities throughout the previous year. It is important to both large corporations and small businesses.
Generally speaking, small businesses need to provide their financial report to their investors and board members. Corporations on the other hand, have to make available for shareholders and interested members of the public their annual report to communicate their activities and financial performance to them.
Why Do You Need It?
The Annual Financial Report may seem stressful, but it is critical for your business operations and is very important when seeking funding from lenders or investors if you want to take your business to the next level. It also ensures your products and services are well-priced.
What does it include?
Typical annual financial reports contain the following items:
- Letter to the shareholders
- Detailed financial statements with narrative text and graphics
- Auditor’s report
- Summary of all financial data provided
- Relevant information pertaining to the business
In addition to the above, there are three basic financial statements that are essential in every small business and must be included in the Annual Financial Report. They are balance sheet, profit and loss statement and cash flow statement:
1. Balance sheet : The company balance sheet for the fiscal year is an important component of the Annual Financial Report. There are two types of assets which include: assets which include cash in the bank and outstanding receivables are listed on the left-hand side.
|Current assets||Fixed assets|
|This includes cash or other valuables that can be converted into cash within a year. Examples are prepaid expenses, inventory and accounts receivable.||Fixed assets include all the items that you don’t intend to sell as day-to-day business operations can’t be carried out without them.|
On the other hand, the liabilities are listed at the right-hand side. The liabilities include outstanding payables, mortgages and loans. It also includes the company’s net worth, which is the value of the company’s possessions if all outstanding debts were paid and the assets were sold off.
2. Income statement : This is also referred to as a Profit and Loss Statement. It shows all the losses incurred and overall profit the company realized within the previous year. The net profit of a company is calculated by subtracting the total operating expenses from the gross profit.
3. Cash flow statement : Cash flow statement shows the total money that comes in to the business and that which goes out of the business. Cash inflows are the sum of all the money coming into the business, including accounts receivable collections, loans, sales (in cash), and other investments. Cash flows include purchase of equipment, expenses on inventory, and workers salaries.