Preparing for an audit isn’t usually on anyone’s list of favorite things but it’s a necessary evil. For software-as-a-service (SaaS) businesses, audit preparation can be particularly stressful because the business model presents its own set of unique challenges related to financial operations that play a critical role in any audit.
With the right preparation, however, an organization can can breeze through SaaS audits.
1. Automate. The key to successfully managing the finances of a subscription-based business is automation. Subscription management solutions can eliminate the need to re-key information or manually enter data by automatically turning closed opportunities into GAAP-compliant customer, contract, subscription, revenue, and invoice schedules — information that can also flow automatically into the general ledger system.
2. Get Organized. Think about how you’re going to structure and run your financial operations as early as possible. Ensure all supporting documents such as contracts, addendums, statements of work (SOWs), purchase orders, vendor contracts, invoices, batch deposit support, and bank statements are filed in an organized manner. Identify a central place for storing these documents. This will create a proper audit trail and allow you to quickly provide samples requested by auditors and avoid wasting time searching through documents.
3. Determine contract structure. The language written within the actual agreement between your business and customers has the potential to impact how or when you recognize that revenue. B2B SaaS businesses seldom have completely homogenous customer bases, especially when there are sales negotiations taking place. That creates the potential for variation in contracts. Lack of a strong policy and organized approach can make audits unnecessarily long.
4. Create a revenue recognition policy. The policy should align with your contracts. The way your agreements are structured can impact revenue. Document your revenue recognition policy. With a little preparation, you can easily point to your revenue recognition policy when an auditor asks why you treated revenue a certain way.
5. Reconcile regularly. Perform reconciliations on a regular basis, preferably monthly or quarterly versus year-end only. Completing such reconciliations in a timely manner allows you to identify, investigate, and resolve any discrepancies quickly. Waiting until the end of the year to perform reconciliation can result in variances that will require more time and effort to resolve.
6. Create checklists. Keep a checklist for the monthly and year-end financial statement close processes that the accounting team or person responsible for closing the financial period can reference. This helps ensure all financial accounts have been rolled forward and accounted for in the proper period. A good checklist should include bank reconciliations, true-up accruals, and adjustment to deferred revenue.
7. Prepare for new standards. It’s important to stay abreast of changes in accounting standards and record transactions. FASB and IASB’s ASC 606 standard on revenue recognition requires companies to change the way revenue is recognized. Consider the impact this has on your financial statements, debt covenants, EBITDA, other KPIs, IT and other resources, internal controls and policies, disclosures, and those who use financials.
8. Anticipate the time commitment. Most people severely underestimate the amount of time it takes to complete an audit. Make sure you’re available to respond to inquiries from the audit firm after you provide them with the requested statements and supporting documents. Auditors will almost always have follow-up questions.
Tim McCormick is the chief executive officer of SaaSOptics, a subscription management platform for emerging and growth SaaS and subscription-based businesses.