5 Essential Questions to Ask When Auditing Contracts

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When it comes time to audit contracts for your small business, it’s important to go in with a plan. A self-audit is a really powerful tool to examine and reconfigure your cash flow. Here are our tips for how best to do it.

The Basics of Auditing Contracts for a Small Business

First of all, we want to make clear that there are audits and then there are audits. The big, scary IRS audit that comes to mind when we use that word is not the one we’re talking about here. It is always a risk but it’s much better to be prepared for that by doing your own self-audits regularly. Not only will they prepare you in case the government comes knocking, they will also help you:

  • Identify and prioritize the money going in and out of your business
  • Understand how contracts impact how your business works, and
  • Spot potential problems like contract leakage.

Questions to Ask When Auditing Contracts for Your Small Business

Since contracts are the bedrock of your operation, auditing them can be laborious, especially if you don’t have a good contract storage system. In our experience, it helps to keep the following questions in mind:

1. What Are Your Goals?

What prompted your desire to self-audit? Was it a contract problem or near miss? Or are you driven to make your company more efficient across the board?

Consider the goals you have for the process so you can plan it with those outcomes in mind. Some specific goals might be a 5 percent reduction in costs across the company, or a similar reduction in staff time spent on fulfillment. Whatever your goal, think it through, set some benchmarks, and share them with your team so they can get invested in the audit’s success.

2. What Kind of Self-Audit Do You Need?

There are three types of contract audits employed by small businesses – traditional, robust, and special. Let’s look at the anatomy of each.

Traditional Audit

This looks for the squeaky wheel. It audits only the highest risk or highest cost contracts looking for a problem. This kind of audit tends to be discrete and is usually initiated when something appears to be going wrong, or when someone becomes worried that it might.

Robust Audit

This is a full and complete reckoning of your entire contract load. In this kind of audit, your team pulls every contract that governs your work – in and out – and goes over them. This is a good kind of audit to do when you’ve discovered endemic bad practices in your contract management lifecycle and want to clean them up before they bite you.

Special Audit

When you work with large entities like governments and corporations, they will often require audits from their partners. Their reasons and the content of these audits vary but they’re frequently the result of government funding or regulatory requirements. If you’re going after new business in government, pharma, or technology, we recommend asking about audit requirements so you can anticipate the time it would take. In some cases, it makes the contract revenue-negative.

3. When is the Right Time to Do This?

Anytime is a good time to revolutionize your cash flow! However, if you’re worried you might not give the self-audit the care and attention it deserves, plan it for a slow time in your business. Many small businesses do an annual audit around the end of Q2 but the seasonality of your work should dictate the right time for you.

4. What Does Each Expense Line Represent as a Percentage of the Whole?

If you’ve ever found yourself staring at a balance sheet and wanting to scream “Yes, I know, but what does it mean?!” you’re not alone. When you’re looking at income and outgoings in a spreadsheet, it starts to look like an alien language. We have found that it helps to group types of expenditures and types of income, and then calculate them as a percentage of your whole business.

For example, does 80 percent of your income derive from a certain type of work? Mazel tov! Do more of that! However, does 60 percent of it come from a single client? Uh-oh. Likewise, if 25 percent of your expenditure is on “computer systems and tools,” it might be worth looking into what each of them does, who uses them, what value they create, and whether there’s a cheaper way.

4. Where Are the Anomalies and What Do They Mean?

Next, you’re looking for outliers. Did your expenses jump by 10 percent last year? Is one client taking the lion’s share of customer service or redlining time? What line items seem more expensive than you expected them to be? Any one of these could be completely reasonable or a red flag.

Modo Modo strategic firm CEO Moira Vetter had the following tips in Forbes for streamlining small business finances:

  1. Convene your team for a monthly financial statement review.
  2. Review credit card statements as a group, identifying recurring costs and cutting them where possible. These small changes really add up in aggregate across the organization. Things like email hosting, social media and website support tools, web hosting, memberships, and file sharing accounts can get out of hand fast if no one is managing those costs.
  3. Plan for capital expenses like computer hardware.
  4. Consider carefully your staff planning and its associated expenses. These might include recruiters, temp agency fees, and advertising.
  5. Question the benefit to your company of meal expenses. Do you really need to pay for lunch?
  6. Think hard about your office space and whether it is serving your needs. If you’re not using all of your space, consider subletting part of it to save on rent.

Your contracts give you an easy way to examine your cash flow. You’re not only finding existing and potential problems but improving performance across the board. You’re making your business more resilient and more efficient!

Make it Easy to Audit Contracts for Your Small Business

The best way to prepare for a contracts self-audit is to have all your contracts in a searchable repository. If you spend the first month of your audit time just scratching around in Dropbox for the right files, you and your team will be exhausted before you even begin. Get a contract lifecycle management (CLM) tool that has metadata tagging. That way you can group contracts by any parameter you want – for example, time, cost, and deliverable.

Anapact is the best CLM tool to support a contract self-audit. It was built for small businesses like yours – and it does so much more. Get a demo today.

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- About the Author

Picture of Louis Balla
Louis Balla
Louis is the Co-Founder of Anapact and partner at Nuage, a top rated ERP consulting firm based in Venice Beach, California.