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Annual reports: truth and beauty

Annual reports: truth and beauty

I deal with annual reports from time to time, one of the more interesting facets of my work. I have watched them evolve over decades, and the changes have been positive.

In its simplest form, the annual report is a set of financial statements, that may or may not come with a piece of interpretation from the head of the company. This is rarely satisfying to work with, or enough.

The annual report has evolved to become one of the most important communication tools available to a company. That became apparent to me when I asked the financial accountant of a bank how she marketed the enterprise. Her response was that the annual report was her go-to document. That led me to thinking harder, rather than just following instructions.

In preparing the annual report, there are two broad sets of recipients of the communication. The first set is the shareholders, who have an interest in performance of the enterprise, and aspects of its viability. This viability can be measured in the short, medium and long-term. The second set is the stakeholders, who will either be affected by the activities of the enterprise, or who will have expectations for beneficial impacts of the enterprise.

There are also two broad environments.

The first is the external environment which should be divided into two subcategories, firstly the impact of the external environment on the operations of the enterprise, and secondly the impact of the enterprise on its external environment.

The second broad category is the internal environment, which can be subdivided into operational, strategic and evolutionary aspects touching on longer-term viability.

The financial statements and the notes fall into a class of their own. Very few people will read them in their entirety, however they often contain vital information that is hidden among the seemingly repetitious pages of results.

There is a good argument for careful assessment of the importance of aspects of the financial statements, and finding ways to lift them out of the mass of information.

The logical path is to develop a couple of matrixes, which can be further subdivided to deal with narrower aspects which are more specific to the enterprise.

The sense that I get from many annual reports is that they are words and numbers thrown at pages. The exercise is guided by following the route that is observed in other reports.

However, by developing the matrixes, and seeking the value of the information, it is possible to develop a clear idea what information shareholders and stakeholders need, and engage them with the value of that information.

This route will also enable the enterprise to better analyse what it is saying, and the reason for saying it, in other words, guiding shareholders and stakeholders to an understanding of conclusions that the annual report reaches.

This can also have an impact on development of the reports of the Chairperson and Chief Executive Officer. In fact, those voices should be identified at appropriate points in the matrix.

One of the key difficulties of annual reports is getting people to read them. There will be a percentage who do not read the main body of the report, much less the financial statements.

There are two ways around this.

The first is to present a page of highlights, an at-a-glance reference to the most important points contained in the report. Once again, this is easy to assemble when the analysis of the messages has been completed.

The second tactic is to use design to differentiate pages. This can consist of take-aways from the page, short features and other aspects of the information. This does not remove information, but rather adds to it. The idea in this regard is to make people evaluate each page, rather than flipping through pages that all look similar.

The annual report should not be seen as drudge work. It is an introspective job, that speaks to the enterprise as much as it does to stakeholders and shareholders.

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