How to Prepare for an Audit

It's a cruel irony that the best parts of a startup's journey are often gated by an audit. To get acquired or to IPO you'll need an audit. As you grow and accept larger investments, you'll need audited financials. Audits are inevitable.

Audits, as painfully as they seem to loom in the popular imagination, don't have to be a source of fear. In fact, audits are an important forcing function in a startup's maturation journey. Good audit preparation leads to better record-keeping, stronger risk management, and ultimately a more objective understanding of your company's financial performance.

The best way to prepare for an audit is to bake in good financial ops practices into your company from day one.

Here are some tips to get you started. These aren't meant to be exhaustive, but these cover the focus areas that many founders often overlook.

1 - Hold your quarterly board meetings and take minutes

Everything flows from the quarterly meeting. A good board meeting sets the foundation for good business decisions. Your board meeting minutes are also your records that show you're fulfilling your fiduciary duty. Getting in the habit of running good board meetings as if you were a bigger company is like "dressing for the job you want."

2 - Implement a Financial Procedures document

Use a policy document to define your financial ops. It doesn't have to be overly strict, but lay out how you'll handle monthly financials, who approves things like purchases and payroll, and how large expenses will be treated. A good policy document will make operations run more smoothly and provide the basis for setting a good foundation with your finance team. Have a section that covers issues related to equity, including when 409a valuations are done, who approves new issuances and options, and how equity will be tracked.

3 - Set up separation of duties early

Separation of duties for purchases means the the person approving a purchase is different from the person submitting a payment. This is harder to do on a small team, but tools like Ramp have approval flows built in that can make setting up separation of duties much easier. When you set up an approval policy, also be sure to write it into your Financial Procedures document.

4 - Have a clear Expense Policy

Make it easy for your employees to save receipts and manage their spend by making a policy and using a system like Ramp or Brex. Ironically, it's often the big-ticket items where records go missing; they're paid with wire transfers and don't get captured by the automated record-keeping systems. Make sure everyone on the team knows where to forward important purchase records so they can be saved. Ultimately the best record-keeping policy is to set a threshold and make sure all invoices and receipts get saved in the accounting system.

5 - Get your IT procedures locked down

Audits these days include more than just examinations of financial integrity; they often include opinions on the IT environment as well. Get your SOC certifications done.

6 - Do Your Taxes

Finally, make sure you handle all your tax issues each year. Even if you're not profitable yet, you'll want a record of losses so you can carry them forward into profitable years. You'll want to set up records of R&D activity for tax credits. There are numerous tax breaks related to startup stock: Qualified Small Business Stock eligibility, and 83(b) elections for founders. Get ahead of these issues and avoid expiring windows. Having tax issues organized will make your audits run much more smoothly.

Use these six tips to bake good financial ops practices into your company from the beginning and you'll pass your audits with flying colors. You'll be able to give prospective investors audited financials, which provide an additional layer of assurance. Ultimately, interested parties want to see evidence of a well-managed company with accurate records of great performance. An audit is a powerful validator, and the discipline you build into your company during the prep process ultimately adds value to your bottom line.

Do you need to pass an audit? Do you want to start building a culture of good financial ops? At Blackpowder we help busy founders set up smoothly running finance stacks. Talk to us today at info@blackpowder.io to get started.