If you work in Quality of Earnings (QofE) or financial due diligence, you’ve probably experienced this moment:
You’re reviewing a set of unaudited financial statements.
The P&L looks reasonable. EBITDA doesn’t raise obvious red flags.
But something still doesn’t feel right.
That’s usually when you say: “Let’s look at the cash.”
In my experience as a CPA who has performed countless proof-of-cash analyses, proof of cash is the single most important procedure in a QofE engagement—especially when the target company is unaudited.
That view is not unique to me.
William A. Chapman, Principal at Baker Tilly, writes:
“When attempting to isolate the earnings of the trailing 12 months, the due diligence professional should be performing a proof of cash… If the cash cannot be proved, then the buyer cannot be sure of anything.”
Source:
Baker Tilly – Ten Considerations in a Quality of Earnings Study
https://www.bakertilly.com/insights/ten-considerations-in-a-quality-of-earnings-study
That quote captures exactly why proof of cash matters.
At its core, proof of cash reconciles what the company reports to what the bank confirms.
It answers a fundamental diligence question:
Do the reported financial results reconcile to actual cash moving in and out of the business?
But a proper proof of cash is not just adding up bank deposits and withdrawals. When done correctly, it provides deep insight into earnings quality, liquidity, and operational reality.
A proof of cash shows how much money actually flowed into and out of the business during the period under review.
By comparing cash flows to the P&L, you can quickly identify:
If cash and earnings fundamentally disagree, it’s an early warning sign that deeper issues exist.
Not every deposit is revenue.
Proof of cash allows you to review deposits transaction by transaction to determine whether they represent:
Without this analysis, it’s easy to overstate recurring earnings.
Owners often believe they’re taking distributions because the accounting system says so.
The bank statement is the final authority.
Proof of cash verifies:
This matters significantly for buyers modeling post-close cash flows.
Some of the most important cash movements never appear on the income statement, including:
Proof of cash forces these items into view.
Monthly P&Ls show revenue volatility.
Cash shows stress.
Cash flow seasonality often reveals:
Balance sheets report AR, AP, and inventory balances—but cash shows how those balances behave over time.
A month-by-month proof of cash often provides better insight into:
A complete proof of cash must explicitly account for:
When performed correctly, proof of cash becomes the backbone of every other diligence conclusion.
Proof of cash isn’t just another workstream in QofE.
It’s the procedure that tells you whether the financial story is grounded in reality.
In the next post, I’ll explain why the way most teams still perform proof of cash—manually, in spreadsheets—is increasingly misaligned with how modern deals actually work.
