SaaS financial audit: What they involve and how to prepare properly

What is a financial audit?

A financial audit is a thorough examination of an organization's financial reports. The audit covers a range of financial statements, including balance sheets, income statements, cash flow statements, footnotes, statements of changes in equity, and any other relevant report.

What’s the purpose of an audit?

The ultimate goal of a financial audit is determining whether or not an organization's financial reports are accurate and compliant with set financial reporting frameworks. Consequently, this goal enhances the credibility of such financial reports with relevant parties, such as shareholders who need to know how well a company is performing when deciding whether or not to invest/divest.  

Why SaaS financial audits are different

SaaS companies run on a dynamically different business model compared to traditional companies. Consequently, their financial practices also differ, and the difference makes auditing different–and more complex compared to auditing traditional companies. The following are some of the reasons why a SaaS financial audit is different:

Recurring payments

SaaS companies sell their software on monthly subscription models, whereby the user has to pay a monthly fee to continue using the software. This helps with bookkeeping as it ensures a steady flow of income and makes it easy to project the future.

Long-term payment structures

The monthly subscription revenue model, unfortunately, is not enough to ensure consistency of income in the long-term. This is because most payment structures are long term; they span several months or years. This makes deferring revenue a challenge, which in turn, complicates SaaS financial audits. 

Financial reports are structured differently

A SaaS company's financial report is dynamically different from an ordinary one. For example, the balance sheet doesn't feature assets or inventory since most of these companies don't keep any.

5 tips on preparing your SaaS business for a financial audit 

Any consequences for a faulty audit will fall square on your company. It is, as such, your responsibility to ensure that everything proceeds smoothly. It entails overcoming the individual obstacles that make a SaaS company financial audit complicated. Here are some tips to get you prepared:

1. Have an effective accounting system

Everything hinges on the efficiency of your company's accounting system. The system should be fool-proof to avoid errors that will complicate accounting and cost you dearly down the line.

Invest in advanced accounting software capable of keeping up with the complexities of the SaaS industry; get customized software or, if possible, build one yourself. Integrate everything to ensure that nothing is left to chance.

It is also advisable to have a team of professional accountants to keep track of the numbers; don't rely absolutely on your accounting software, regardless of how impressive it may be. The team should also include people conversant with the law to ensure that you comply with the set regulations. Have someone that will see to it that you comply with all International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), depending on which class applies to your company.

2. Organize and keep track of documents

Losing track of financial data and documents is one of the main causes of complications in performing a SaaS financial audit. It is recommended to have a central storage location for all your documents, including bank statements, contracts, Pos, and anything related to your company's finances. A backup of this data is also necessary.

Most SaaS companies, as you will agree, are too busy growing their businesses to keep track of all documents. If this describes you, then you should consider soliciting revenue recognition services. ProfitWell has a sophisticated revenue recognition program capable of managing thousands of spreadsheets in seconds.

3. Automate procedures

Every SaaS company knows to do this, but most don't prioritize it. It is essential and urgent as it will minimize errors and make accounting easier. Automation will also help streamline other aspects of the company's operations and, consequently, improve its overall efficiency.

4. Reconcile regularly 

Other companies can afford to wait until the financial year-end to reconcile their documents, but you cannot. Remember: your revenue channels are scattered and inconsistent, so leaving the documents to pile up will only further entangle the web. 

Reconcile your documents regularly; a monthly or quarter-yearly basis is recommended, depending on the size of your company. Your accounting system will catch errors and inconsistencies early, thus simplifying things for the auditors; alternatively, you can trust it to a ProfitWell's next-gen revenue recognition system. It will also save you a lot of time and money that you would need to spend to disentangle the proverbial web several months down the line.  

5. Keep checklists 

How do you know that you have everything covered before the audit, especially considering all the data and revenue streams? A simple way to ensure that nothing gets left to chance is by keeping a checklist. It should include everything, including bank reconciliations, adjustments to deferred revenue and accruals, among others. Go through the checklist whenever you are updating your financial reports and ensure that each box is checked.

5 metrics included in a SaaS financial audit

So, what is included in a SaaS financial audit? Answer: everything touching on the company's finances. The list is long, and the factors themselves may vary from one company to another. Here is an overview of five of the most significant factors considered during a SaaS company financial audit:

1. Revenue

Revenue is the most important factor considered during a SaaS financial audit. It entails all revenue channels, including subscriptions, customizations, upgrades, and more.

2. Cost of goods sold (COGS)

The cost of goods goes beyond monthly subscriptions. It includes the value of creating and delivering those goods.

3. Operating expenses

Besides the cost of generating and delivering goods, what other expenses does your company incur? Expenses may include salaries, rent, renovations, utilities, and more. These, too, are taken into account during an audit.

4. Income

This refers to the company's bottom line or net income. It is intertwined with the company's revenue and operating expenses, in addition to other financial aspects that may be unique to your company.

5. Recognized/deferred revenue 

Recognized revenue is that which has been earned while deferred revenue is expected but not guaranteed. Both categories of revenue have to be identified and valued. This is partially what makes a SaaS financial audit especially complicated because it is difficult to put a number on the value of deferred revenue.

SaaS companies have one of the highest growth rates of any industry. Unfortunately, many of them rise fast and fall just as fast. You cannot afford to make the same mistake. So, get your house in order and start with your accounting department. Better still; leave it to us and be assured that all the numbers will add up!