By Tim McCormick, SaaSOptics
Audits are never a walk in the park, but the unique financial requirements of a SaaS business model can make them especially challenging.
Many growing SaaS businesses start out managing financial operations with a combination of spreadsheets and traditional accounting software. As the business grows, this method eventually breaks down and, when an audit is nearing, presents problems due to data that is inconsistent, unreliable, and inaccurate. Enduring an audit without access to real-time data means combing through spreadsheets and hours of manual work to justify your numbers.
This scenario isn’t uncommon among quickly growing SaaS businesses, but many don’t feel the pain until it’s time for an audit. With the right preparation, audits can be seamless. With these seven steps, you’ll be ready for financial audits and improve your financial operations at the same time.
- Take The Time To Organize. When you're trying to get a company off the ground, everything happens at a fast pace. Things like market analysis and product become your top priorities and can take precedence over tracking your finances. It’s easy to see why this happens because you need to make money before you can manage it. This usually leads to finance taking a back seat.
Think about how you want to structure and run your financial operations. Identify a central place for storing and organizing documents such as contracts, addendums, SOWs, purchase orders, invoices, batch deposit support, and bank statements. This will create a proper audit trail and allow you to quickly provide samples requested by auditors so you won’t waste time manually searching for documents.
- Automate. SaaS businesses focused on rapid growth often rely on a general ledger combined with multiple spreadsheets to manage their financial operations. With growth, those spreadsheets become more complex and, in the face of an audit, it becomes clear that this approach leads to errors, takes too much time, and simply doesn’t work.
Automation is the key to successfully managing the finances of a subscription-based business. A subscription management solution will eliminate the need to manually enter data by automatically turning closed opportunities into GAAP-compliant customer, contract, subscription, revenue and invoice schedules—information that also can flow automatically into the general ledger system. They also allow you to present polished, accurate revenue recognition and financial metrics that will inform operational decisions, streamline audits, and satisfy potential investors or buyers.
- Define A Contract Structure. The language written in 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 sales negotiations are taking place. This creates the potential for variation in contracts and, without a strong policy and organized approach, can make audits unnecessarily long.
- Create A Revenue Recognition Policy. Your company’s revenue recognition policy should align with contracts because the way you structure agreements can impact revenue. It’s important to document your revenue recognition policy. With a little preparation, you can easily point to your revenue recognition policy to respond to auditor inquiries.
- Regularly Reconcile. You should perform reconciliations on a regular basis, preferably monthly or quarterly versus year-end. Doing this allows you to identify, investigate, and resolve any discrepancies in a timely manner. Waiting until the end of the year to perform reconciliation can lead to variances that will require more time and effort to resolve.
- Develop Monthly and Year-End Financial Close Checklists. Keep a checklist for the monthly and year-end financial statement close processes that your accounting team or person responsible for closing the financial period can reference. This will 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 adjustments to deferred revenue.
- Be Realistic. Most people severely underestimate the amount of time it takes to complete an audit. After you provide the audit firm with requested statements and supporting documents, you’ll need to be available to respond to inquiries. In almost every case, auditors will have follow-up questions.
About The Author
Tim McCormick is the CEO for SaaSOptics, a subscription management platform for emerging and growth SaaS and subscription-based businesses. Founded in 2009 by entrepreneurs who lived the challenges of running their own SaaS business, SaaSOptics provides the day-to-day financial management capabilities needed and the auditing, reporting, and analytics that are critical for future growth.