If you’re working through a seller’s deal book right now, every number in it sits on top of revenue: the add-backs, the margin, the debt service coverage, and the price you’re about to offer.
So before we test a single add-back for a buyer, we check whether what the seller reported actually hit the bank account.
That check is called a proof of cash. On the deals we work on, it’s the most important diligence step at this size, because everything else in diligence sits on top of it. It helps to start with what the work actually involves.
What Is a Proof of Cash?
A proof of cash is a reconciliation that ties the seller’s reported revenue and expenses to the cash that actually moved through the business’s bank accounts over the same period. If the P&L says the business brought in a certain amount last year, the deposits should support it, once you account for everything that moves cash without being revenue.
We reconcile more than the operating account. The work covers every bank account, the credit cards, receivables, payables, owner draws, and any money the owner put in. Each of those can make the P&L and the bank disagree for perfectly ordinary reasons, and each has to be explained before you can say the revenue is real.
The bank statement matters because it’s the one record the seller didn’t build. The IRS recordkeeping guidance for small businesses points the same way: it lists “bank deposit slips” and “credit card charge slips” among the documents that show gross receipts, and it suggests recording whether each deposit is “business income, personal funds, or loans,” per IRS Publication 583. A proof of cash holds the seller to that standard after the fact.
That raises an obvious question for anyone borrowing to buy: doesn’t the bank already check this?
Why the SBA Lender’s Review Is Not Your Proof of Cash
The SBA lender’s review is there to protect the bank. Banks doing SBA loans review tax returns and debt service coverage, but in our experience they don’t run a proof of cash, and the people underwriting your loan generally aren’t CPAs doing diligence on your behalf.
It’s easy to treat a loan approval as a second opinion on the business. The lender is really asking whether the business can carry the debt on the numbers presented, and whether those numbers are real is a separate question. If the revenue the seller reported never reached the bank, the bank won’t tell you, so the proof of cash falls to you.
The good news is that the procedure isn’t mysterious. It comes down to a handful of steps, and the next section lays them out in the order we run them.
How a Proof of Cash Works, Step by Step
A proof of cash works by starting from the seller’s reported revenue and walking it, item by item, to the deposits on the bank statement, then doing the same for expenses and disbursements.
Here are the steps we follow on a buy-side engagement:
- Collect every account. Every business bank account and credit card for the full period, including the ones the seller forgot to mention.
- Total the deposits by month. Then pull out everything that isn’t revenue: transfers between the seller’s own accounts, loan proceeds, owner contributions, and refunds.
- Tie the remaining deposits to reported revenue. Compare month by month, not just the annual total, so a timing issue doesn’t hide a real gap.
- Run the same test on the way out. Disbursements should support reported expenses, and owner draws should be visible as draws, not buried in cost lines.
- Bring in the tax return. The business return is a third reference point. When the P&L, the deposits and the return all tell the same story, you can lean on the number.
Say the P&L shows $1.2M in sales and the deposits for the year come to about $250,000 more than that. Once you pull out an equipment loan, money the owner moved over from savings, and transfers between the seller’s own accounts, the gap closes to almost nothing. That’s proof of cash that ties.
On a smaller or simpler deal, a lighter version can be enough. For a content business we diligenced, the revenue came from ad platform statements, so the test was tracing those statements back to actual bank deposits and confirming the timing made sense.
That timing piece deserves its own section, because it’s where most buyers misread their own results.
Timing Gaps Are Not the Same as Missing Revenue
A proof of cash that doesn’t tie on the first pass hasn’t failed yet. Most first-pass gaps are timing, and the job is to separate timing from missing money.
On one content business acquisition we worked on, the seller recorded revenue on an accrual basis, but the main ad network held payments for around 60 days. What showed up in the P&L as one month’s revenue didn’t hit the bank until two months later. When we first reconciled the P&L to the bank statements, the gap looked meaningful. That gap was just the difference between accrual and cash, but you have to know it’s there or it looks like money is missing.
Cash-basis books create the mirror image. If a target takes large upfront deposits on orders and records everything when cash arrives, revenue timing gets distorted in the other direction, and a deposit for work not yet done reads as earned revenue. Customer deposits and deferred revenue are obligations you’d inherit when you buy the business.
Card processors add one more layer, because payouts arrive net of fees and refunds. Gross sales won’t equal net deposits, and that’s fine as long as the fees are recorded.
Once timing is explained, whatever gap is left is real, and that’s what the next section is about.
What Does a Failed Proof of Cash Usually Mean?
A failed proof of cash usually means the books were built around the seller’s own workflow. It’s rarely fraud, but it still changes what you’re buying.
The causes we see most often fall into a few buckets:
- Phantom revenue. Invoices that were really quotes, left open in the books, show up as revenue with no deposit behind them. The bank side is where that gap surfaces. We cover the habit behind it in our quality of earnings guide.
- Commingled money. Personal spending, a second business or family transfers running through the same account make both sides of the reconciliation unreliable until they’re separated.
- Money that isn’t the seller’s. Deposits can include sales tax collected from customers, which belongs to the state, not to the business you’re valuing.
- Books that just don’t hold up. On a specialty retail deal, the books showed $1.2M to $1.3M of inventory and the physical count came in around $490,000. Once one number on the balance sheet is that far off, every other number needs to be questioned.
A failed proof of cash doesn’t automatically kill a deal. If the bank statements can still prove the cash flow, a buyer can sometimes rebuild the earnings from the deposits up and price the deal on that number. The point is going in clear-eyed about what you actually know and what you’re taking on faith.
Whether you need help getting there depends on the business, which is the next thing to decide.
When a DIY Proof of Cash Is Enough
A DIY proof of cash is reasonable when the business is simple. If the seller runs cash-basis books with one bank account, or the revenue comes through a system that verifies itself, like an Amazon seller account, a careful buyer with a spreadsheet can get a long way.
It gets harder fast. If the seller keeps accrual books, carries significant receivables or payables, or runs e-commerce with inventory, that’s when you want a professional in the room. The timing adjustments multiply, the balance sheet starts to matter as much as the P&L, and a mistake in the reconciliation can hide exactly the problem you were looking for.
You can overpay for diligence heavier than the deal warrants, or under-diligence and inherit a problem you didn’t see coming. A proof of cash is often the right first step either way. We offer it on its own, and it’s also the first piece of every quality of earnings report we do.
Whichever route you take, the work goes faster when the documents are right from the start.
What to Ask the Seller for Before You Start
Ask for the documents after the LOI, when you have the standing to go deeper. Before the letter of intent, a by-month P&L, a balance sheet, and the CIM are usually enough. After it, the request widens to the full set.
For a proof of cash, that set includes:
- Bank statements for every business account, for the same months as the P&L, ideally 24 months.
- Credit card statements for every card the business uses.
- The business tax returns for the same years.
- Receivables and payables reports at each period end, plus any loan statements.
- A list of every account the seller or the business has used, including closed ones.
Ask for PDF bank statements straight from the bank, not CSV exports. A CSV can be edited. A PDF is much harder to change, and if you’re borrowing, your lender will be more comfortable with it too.
Proof of cash is only the first item on the list. Our buy-side due diligence checklist covers what comes after it, from sales tax exposure to the liabilities that never make it onto the balance sheet.
If you have a target under LOI and want to know whether the seller’s revenue holds up, reach out to Ashford Sky, and we’ll run the numbers with you before you sign anything you can’t unwind.
Until next time.
