We are preparing for a buy-side Quality of Earnings audit, but our operational data for historical inventory pricing and unbilled revenue is messy. How do we clean up the raw operational logs that back up our balance sheet before the audit starts?

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Tyler Smith · Accepted Answer

A Quality of Earnings, or QofE, audit is where most deals go to die or get chipped. Financial buyers do not just look at your tax returns. They will audit the relationship between your physical operations and your ledger. If your inventory tracking or unbilled revenue logs do not perfectly match your general ledger, the buyer will assume your numbers are unreliable and discount your value. To clean this up before the buyer's analysts arrive, you must run an internal reconciliation process. Start by matching your physical operational milestones, such as shipping logs or project sign-offs, directly to your invoice dates. Buyers look for revenue recognition mismatches. If you recognized revenue before a service was fully delivered under your contract terms, they will claw it back from your EBITDA. Next, run a clean-up Rock for your finance team to reconcile historical inventory adjustments. If your team has been relying on year-end physical counts to make massive adjustments to the cost of goods sold, you need to transition to monthly cycle counts immediately. Use the Step by Step Exit methodology to document this reconciliation. Show the exact operational flow from order placement to shipping and billing. When you can hand a buyer a documented process that matches your cash flows, you remove the risk premium they would otherwise use to lower their offer. This is how you protect your valuation during intense due diligence.