Quick answer: A proof of cash is a reconciliation that compares what the bank statements show was deposited and paid out with what the books report as revenue and expenses, month by month. Buyers’ accountants run it to confirm that reported revenue became cash and that spending is complete. Differences are classified as timing, transfers, owner items or unexplained, and unexplained differences become diligence questions that can reduce adjusted EBITDA or the buyer’s confidence in the books.
Key points
- A proof of cash starts from the bank, which the seller cannot restate, and works toward the books. Buyers use it to test whether reported revenue arrived as cash and whether the spending in the books is complete.
- Every account counts, not only the operating account. A missing payroll, processor, savings or owner account is the first thing a reviewer looks for.
- Most differences are timing or transfers and clear with documents. The ones that matter are revenue the bank does not support and spending the books do not show.
- A seller can run the reconciliation first. Differences found and explained by the seller are an accounting task, while differences found by the buyer become a credibility problem.
What a proof of cash tests
A proof of cash reconciles the cash that moved through the company’s bank accounts with the revenue and expenses recorded in the books, month by month. It answers two questions that an income statement cannot: did reported revenue arrive as cash, and does the spending in the books include everything that left the bank? The bank statement is outside evidence that the seller cannot restate, and the ledger is the seller’s own record. When the two agree after known differences are explained, the ledger earns credibility. When they do not, the unexplained differences are the findings.
The decision rule for a buyer is practical. It runs a proof of cash whenever the earnings figure carries the price and the books are kept by the owner or a small bookkeeping team, and it looks harder when cash is a large share of receipts. The test sits inside the quality of earnings review, usually early, because its result sets the scope of the rest. A clean proof lets the accountants sample more lightly elsewhere. A poor one widens every other test.
It differs from the bank reconciliation a bookkeeper prepares each month. That reconciliation matches the book balance to the bank balance on one date. A proof of cash proves the movement over a period: the opening balance, the receipts, the disbursements and the closing balance, compared between the bank and the books, with every reconciling item listed.
Building the reconciliation, account by account
- Collect every account. Operating, payroll, merchant processor, credit card clearing, savings, line of credit, and any account in the name of the owner or a related entity that touches the business.
- Take each month from the bank. Opening balance, total deposits, total withdrawals and closing balance.
- Take the same month from the ledger. Opening balance, receipts, disbursements and closing balance.
- List the reconciling items. Deposits in transit, outstanding checks, bank fees, returned items, and transfers between accounts, which appear on both sides and must net to zero across the full set of accounts.
- Classify the rest. Each deposit is revenue, a transfer, a loan draw, an owner contribution or another receipt. Each withdrawal is an expense, a transfer, a loan repayment, an owner distribution, a capital purchase or the payment of an old liability.
- Bridge to the income statement. Customer collections, adjusted for the change in receivables and in customer deposits, should equal reported revenue. Operating payments, adjusted for the change in payables and accruals, should equal reported expenses.
What the differences reveal
| Difference | Common explanations | What the buyer does with it |
|---|---|---|
| Reported revenue higher than the bank supports | Receivables growing faster than reported, invoices booked and never collected, credits or write-offs, customer payments going to an account not yet provided | Tests receivable aging and cut-off, asks for every account, and may reduce revenue and EBITDA or raise the allowance for bad debts |
| Deposits higher than revenue | Loan draws, owner contributions, vendor refunds, advance payments from customers, or revenue missing from the books | Asks for the source of each deposit, reclassifies documented non-revenue items and treats missing revenue as a finding about the ledger |
| Payments the books do not show as expenses | Owner personal spending, business costs booked to the balance sheet, payments of old liabilities | Traces each payment by payee, deducts unbooked business costs and classifies personal payments as owner items |
| Expenses booked but never paid | Old payables, accruals never reversed, items netted against customer credits | Ages payables, tests the accruals and raises debt-like items |
| Transfers that do not net | An account missing from the set, or a transfer to a related party | Requests the missing statements and widens the scope until transfers net |
| Receipts held across a period end | Checks received in one period and deposited in the next, undeposited funds | Matches deposit dates to invoice dates to test cut-off |
A quarter of deposits reconciled to reported revenue
The example below tests one quarter of revenue. It is a simplified version of the bridge in the last step above.
Illustrative example: From total deposits to revenue the bank supports
A company reports quarterly revenue of $3,500,000. A reviewer starts from the bank statements of every company account.
| Step | Amount |
|---|---|
| Total deposits across all company accounts | $3,900,000 |
| Less transfers between company accounts | ($250,000) |
| Less line of credit draw | ($300,000) |
| Less owner contribution | ($50,000) |
| Less vendor refund and insurance proceeds | ($30,000) |
| Plus increase in accounts receivable | $200,000 |
| Less increase in customer deposits held | ($100,000) |
| Revenue supported by the bank | $3,370,000 |
| Revenue reported in the books | $3,500,000 |
| Unexplained difference | $130,000 |
Reported revenue exceeds what the bank supports by $130,000, and the reviewer asks why. Customer payments may have gone to an account the seller has not yet provided, credits may have been applied against invoices, or revenue may have been booked that will not be collected. Each cause has a different consequence. A missing account widens the scope, credits are a presentation point, and uncollectible revenue lowers EBITDA. The numbers are invented to show the mechanics and are not benchmarks.
The spending side runs the same way. Withdrawals are stripped of transfers, loan principal, owner distributions and equipment purchases, adjusted for the change in payables, and compared with reported expenses. A gap shows spending the books do not carry as an expense. If it is a business cost, adjusted EBITDA falls. If it is personal spending that was booked to a balance sheet account, it never reduced earnings, so there is nothing to add back.
What the bank cannot prove
A proof of cash can test only money that touched both the bank and the books. Sales paid in cash that were neither deposited nor recorded are invisible to it. A buyer will not pay for earnings it cannot verify, and unrecorded sales also raise questions of tax compliance that belong to the seller’s CPA and attorney. Cash-intensive businesses are therefore tested with outside evidence, such as point-of-sale reports, units sold against inventory movement and processor statements.
The test also says nothing about when revenue belongs. A customer can pay for work not yet done or be invoiced for work already done, and the cash proves the collection but not the period. Recognition is tested separately in revenue recognition diligence. The proof is only as complete as its set of accounts, which is why a missing account matters more than any single difference.
Preparing the bank records before a buyer asks
- List every account. Include accounts closed during the review period and any account in an owner’s or related entity’s name that received customer payments or paid business costs.
- Pull the full statements. Every month, every account, in the form the bank issues. A gap in the statements is the first question a reviewer asks.
- Document the recurring non-revenue items. A short schedule of loan draws and repayments, owner contributions and distributions, and transfers, each with support, saves rounds of questions.
- Obtain processor and platform reports. Gross sales, fees, refunds, chargebacks and payout dates let net deposits tie to gross revenue.
- Separate personal spending from here on. Personal items paid through the business complicate every later month, and earlier months are tested as they were.
- Run the proof first. A bookkeeper or outside accountant can do it before launch, and it is one workstream of a sell-side quality of earnings report. The checklist for cleaning up financial statements covers the wider clean-up.
Books kept on a cash basis make the revenue bridge simpler and hide receivables and payables, so a conversion to accrual accounting for the review period usually goes alongside the proof. The unexplained differences that survive are listed with their price effects in quality of earnings findings that reduce price, and the whole review is mapped in the guide to due diligence in a business sale.
Frequently asked questions
How is a proof of cash different from a bank reconciliation?
A bank reconciliation matches the book balance of cash to the bank balance on a single date. A proof of cash covers a whole period: it compares the opening balance, receipts, disbursements and closing balance between the bank and the books, classifies every deposit and withdrawal, and ties the result to reported revenue and expenses.
Which periods does a proof of cash cover?
Usually the months inside the quality of earnings review, tested month by month for the most recent period and sometimes by quarter or by sample for earlier ones. The reviewer sets coverage by the size of the business, the condition of the books and what the first months show. Clean early results can narrow the rest.
Does a proof of cash work for a cash-intensive business?
It tests cash that reaches the bank and the books, so it cannot see sales that were neither deposited nor recorded. For businesses that take much of their revenue in cash, reviewers add outside evidence such as point-of-sale reports, units sold against inventory movement and processor statements. Revenue that cannot be tied to any of these is hard to include in the price.
What happens when a proof of cash shows unexplained differences?
The reviewer lists each difference and asks for documents. Differences that clear as timing or transfers drop out. Those that remain can reduce adjusted EBITDA, add deductions to proceeds, widen the scope of testing or lead the buyer to ask for an escrow or a specific indemnity. The outcome depends on size and cause.
Can a seller run a proof of cash before going to market?
Yes, and it is a practical way to find problems early. A bookkeeper or outside accountant collects every bank statement, classifies each deposit and payment and ties the totals to the ledger. Differences found by the seller can be fixed or explained before any buyer asks. Differences found by a buyer arrive as questions about the whole set of books.
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Related guides
- Quality of Earnings Report: What It Is and What Buyers Test: A quality of earnings report tests whether a company’s reported profit is real and repeatable. See what buyers examine, how it affects price and how sellers prepare.
- Prepare Financial Statements for the Sale of a Business: A Practical Checklist: A cleanup checklist for sellers: monthly close, reconciliations, revenue cut-off, inventory, related-party items and tax return ties, and which fixes move earnings.
- Quality of Earnings Findings That Reduce Price and How to Pre-Empt Them: The quality of earnings findings that most often lower a sale price, such as rejected add-backs and cut-off errors, with how each appears and how to pre-empt it.
- Sell-Side Quality of Earnings Report: Scope, Timing and How to Use It: What a sell-side quality of earnings report covers, when an owner should commission it, who should perform it and how to use it in the CIM and with buyers.
- Revenue Recognition Due Diligence: Where Buyers Find Problems: How buyers test when revenue is recorded in a sale: cut-off, bill-and-hold, percentage of completion, deferred revenue, rebates, channel stuffing and warning signs.
- Managing the Diligence Process as a Seller: Request Lists, Q&A and Response Discipline: How a seller runs due diligence: one point of contact, a request tracker, staged disclosure, a Q&A log and response discipline while the business keeps performing.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.