KRONA’S FINANCIAL DEPARTMENT
FROM: MANAGER
TO: NEW EMPLOYEE
SUBJECT: COMPONENTS AND PROCESS OF CREATING ANNUAL REPORT
Annual reports are basically an enterprise’s formal financial statements which are usually published annually and later send to the shareholders of the business as well as other interested parties. Conversely, the main reason for doing so is because it is the report which assists in assessing not only the year’s operations of the company but also aids the stakeholders in discussing the views of the company for the upcoming year/s, place, and prospects (Friedlob & Welton, 2008). Despite that one, since both profit and non-profit organizations produces annual reports, there are various components of an annual report, what information they provide, and why they are important to understand when it comes to creating such a report. Three of them are discussed below;
- a) Sale and marketing summary
Basically, what this will be suggesting is that, the importance of annual report for sales and marketing to senior executive or members of both the sales and marketing teams is that it will be informing them the extent in which the business performed as compared its targets or the set objectives (Mladjenovic, 2006). Consequently, this summary will be explaining all the various factors (internal and external) which might have affected its results as well as describing any actions the teams must have taken in dealing with opportunities or problems encountered. Other than providing detailed information to company’s internal decision-makers, this summary also has the ability of forming part of the annual report to investors.
- b) Financial statements subsidiaries
Financial statements are basically the collection of data which deals with the financial results, condition, and cash flows of the company. This is to say that, such statements for instance balance sheet, check sales, profits, R&D spending, inventory and debt levels over time subsidiaries has the ability of providing various information regarding the inflow and the outflow of finances to both the creditors and potential investors. Usually, they use these statements for evaluating the financial performance of the company.
For instance, determining the capacity of the business in generating cash, sources or the use of that cash, its ability of paying back its debts, tracking the financial results on the trend line of the business so as to mark any threatening profitability issues and derive various financial ratios from these statements which indicates the general condition of the enterprise (Albrecht, 2007).
In addition to that, as a means of formulating the annual report, the managers use it in publishing financial reports, communicating with other interested external about their accomplishments in running the business. The reason for that is because to the annual report, it should be noted that different financial statements will be used in accessing the strengths and weaknesses areas of the company (Albrecht, 2007).
- c) Financial and operating ratios (liquidity, solvency, and profitability)
In formulating annual reports, financial ratios act as indicators of the performance as well as the financial condition of the firm. On the other hand, operating ratios assists in showing the efficiency of the management of the firm through comparing its operating expense and net sales. For instance, liquidity ratios are regarded as a class of financial metrics which will be used in accessing the capacity of the firm in settling its short term debts. To the report, if the value of this ratio is higher, it means its margin safety it possesses in covering its short-term debts was higher and vice versa (Khan & Jain, 2007).
Solvency ratio acts as an indicator of the efficiency of the cash flow of the firm in meeting its short and long term liabilities. To the annual report, the higher the solvency ratio, the lower the possibility of defaulting its debt obligations and vice versa. Similarly, profitability ratio will be measuring the capacity of the firm in generating earning as compared to sales, equity, and assets.
Reference
Friedlob, G. T., & Welton, R. E. (2008). Keys to reading an annual report. Hauppauge, NY: Barron's.
Mladjenovic, P. J. (2006). Stock investing for dummies. Hoboken, N.J: John Wiley.
Albrecht, W. S. (2007). Accounting, concepts & applications. Mason, Ohio: Thomson/South-Western.
Khan, M. Y., & Jain, P. K. (2007). Financial management. New Delhi: Tata McGraw-Hill.
