Proof of Cash

Proof of cash is a comparison of a company's financial records with bank receipts and payments that helps a buyer investigate whether recorded activity is supported by cash movements.

Why proof of cash matters to people buying a small business

Earnings depend on expense records as much as revenue records. A review that checks money coming in but takes money going out on trust leaves half the picture untested. A buyer needs to know whether that gap exists before relying on the work.

A cash proof should cover payments as well as receipts. Incoming bank activity is reconciled with revenue and accounts receivable; outgoing activity with expenses. Some reviews skip the expense side because it is harder, even when the report looks thorough.

The small business earnings review guide places this work within financial diligence. A proof of cash supports the records; it doesn't validate every sale.

How proof of cash is used

The reviewer compares recorded activity with the bank statements and investigates differences. Ask which accounts and periods were covered, whether both receipts and payments were tested, and what is still unreconciled. The answers determine what the findings mean.

For example, suppose a service business records customer receipts and supplier expenses. The reviewer ties incoming payments to the records but finds an outgoing bank payment the expense records don't explain. Management sends more documents. Until the difference is explained, the buyer should see it marked as open.

A difference is a question, not a verdict. It doesn't mean the payment was improper, and closing it doesn't make the earnings reliable. It needs an explanation, and the explanation needs support.

Common mistakes in proof of cash

A matching total doesn't explain every transaction behind it. Know what was compared and what the reviewer concluded.

Another mistake is treating a receipts-only review as a full cash review. Ask about outgoing activity directly. And cash evidence won't tell you whether customers will keep buying or whether the business can run without its seller.

Related terms

A quality of earnings review can include a proof of cash, depending on the engagement's scope. Accounts receivable covers amounts customers still owe, which is why recorded revenue and receipts need to be read together.

Source notes

The cash-proof guidance is paraphrased from a podcast interview about quality-of-earnings work; examples are our own.