annual report

annual report

The Importance of Annual Reports in Business

1. Introduction

To produce a good annual report is about transparency to the public and shareholders. Hence, the company should include comprehensive elements in the report. It consists of a clear message of the company and a good explanation and informative report. Other than that, there are some tips that the company can use as guidelines to prepare an annual report. First of all, it is important to understand who the stakeholders are. It is about identifying the needs of the target audience and stakeholders. This will be the basis to decide what information should be highlighted in the report. Normally, the stakeholders are the investors or potential investors, customers, employees, and suppliers. So the company should include the most relevant information, such as the financial statements and the performance of the company. Then, it is important to plan the report comprehensively, and this should involve the employees who are responsible for doing the report. Good planning and organization are very helpful in producing an effective report.

Every year, organizations are required to prepare their annual report. The importance of an annual report is to provide information on the company’s performance to the public, to evaluate how the company operates, and to help in making investment decisions. It is crucial for a company to present a good annual report because it can affect the company’s image as it reflects how the company is being managed. This report can be a tool to promote a business and provide key information to attract potential investors. Furthermore, producing an annual report is to comply with statutory requirements because every company, whether public or private, is required to lodge financial statements with the Companies Commission of Malaysia under SSM. Failure to do so, the company and every officer of the company who is in default shall be guilty of an offence under this Act.

2. Financial Performance

The second major part of an annual report is the financial review. This section reveals the importance of having an intelligent financial structure and its effect on the company’s performance. It also provides detailed data on the company’s financial performance. This includes the results of operation, the statement of income, the statement of changes in financial position, and the statement of cash flows. This data allows stakeholders to evaluate a company’s economic performance over a specific time period. If reviewed regularly, it can help identify trends and indicate whether there is a possibility the company may be facing financial difficulties. Another key element of a financial review is assessing a company’s profitability and solvency. This can determine the company’s ability to meet its fixed financial charges and the flexibility of financing new investments and unanticipated expenditures. Percent measurements included in the profitability analysis provide a direct indication of the company’s operating efficiency and the success of control in administrative expenses. Stakeholders may also be interested in how efficiently the company is using its resources as this is a factor that may affect longevity. This can be evaluated by comparing the past and current profitability and growth rates to those of other companies that have similar operations. Those concerned with the company’s future survival and growth will particularly evaluate solvency and the ability to service debt or take on new financing. Measures in the assessing solvency analysis provide a broad indication of whether a company will be able to maintain the same level of operations in the future.

3. Business Highlights

The importance of the annual report, he adds, is to “let the facts speak for themselves.” There are widespread uses of annual reports; they can be used to help develop strategy, used as a tool for marketing, they are used to improve public relations, they can be used to meet legislative requirements and can help with resource allocation. The information used in an annual report can be beneficial to a wide range of users enabling the firm to send a broad and positive message to everyone. Written information is much more permanent than verbal communication and it creates a permanent record of the key events and learning within an organisation, allowing “organisational memory to survive beyond the tenure of one or two managers” (Brigham et al. 1985, p.3). This can help future employees avoid the same mistakes and can sustain the competitive advantage. Stoltz (1995) suggests that an annual report can suggest a standard of quality and excellence and can also restore confidence and commitment to employees during times of change and uncertainty. Both existing and potential employees can use the report to learn more about their employers and the ones they are considering to work for. Competition can use the reports to gather information on each other and the public and non-profit sectors can use it to form prudent decisions about the organisation. Public investors are likely to have the most interest as any information that the annual report offers (providing they know how to interpret) can be used to make a more informed decision on whether to buy, hold or sell a company’s securities and the individual investor has an alternative source of company information other than computer databases.

4. Corporate Social Responsibility

Corporate social responsibility (CSR) has become a part of business strategy for many companies in their effort to consider the effects of their operations on society and the environment. Virtual meetings can help the company ensure that they clearly understand what the customer needs and they can ask for advice about the suitable specifications for the company without booking another meeting. Essentially, the business judgment rule says that if you are going to make any decisions, you should think of the impact on your shareholders and whether it is necessary to do or not to do. Based on the resource from Mr. President, the consideration will lead to corruption because you are not focusing on the main purpose of the decisions. It may lead to people who have a relationship with each other and the better impact of the decision for society should be negotiable. But that’s human nature, unwilling to sacrifice something for a higher purpose. On the other side, society expects companies to achieve their economic benefits without neglecting the larger interests of society at large. That’s why we can see the government intervening in business activities with their policies and sometimes the public criticizing actions made by companies when they do not benefit society. This state of affairs can be escaped from the business judgment rule itself. Why don’t we just make a decision that will bring a little impact to society but allow us to get away from the main decision purpose? This is the main trigger for companies today to consider CSR. It may be hard because several activities that serve their own interests have been fenced with legal rules, but if companies really want to change, it should be a good start. And the final consideration is about the environment. Society always blames companies for pollution, deforestation, and the destruction of natural resources. All of those plans are only considered to achieve their strategic goals without considering the consequences. So CSR is a step to take responsibility for all the mistakes and make a commitment to change that will have a better impact on society and the environment.

5. Future Outlook and Conclusion

The final section of an annual report is the most important. This is where the company can instill faith in investors and gain more confidence. All previous sections, considering the statistical data, the economic and stock reports, and the growth, changes, and developments, contribute to the forecast regarding the future. Positive future outlooks can result in increased market activity and demand for the company’s stock. Through careful documenting and proving the advanced growth and development, a company allows both current and potential investors to feel a part of that progress. They can recognize and get behind the successes and advances they have seen take place. On the other hand, if a company’s past has been one of significant loss or damage and future prospects appear weak, investors are likely to pull out, realizing their investment is no longer ideal. The report doesn’t necessarily have to show success and potential advancement. A company with a negative past showing only minimal, yet significant improvement can still create a more satisfied investor to keep. Through careful analysis and communication, an annual report has the power to simulate the status and reaction of the market in relation to the company’s progress and make changes accordingly.