Glossary
Proof of Cash
A proof of cash is a reconciliation that ties a company’s bank statements to its accounting records over a full period, matching total receipts and total disbursements separately to confirm that the cash activity in the books actually happened. It is one of the most revealing procedures in a Quality of Earnings report, and our transaction advisory practice runs it on every deal where cash is material.
How a proof of cash differs from a bank reconciliation
A month-end bank reconciliation answers a narrow question: does the ending bank balance match the books on that date? It can tie out perfectly while still hiding unrecorded deposits and payments that net to zero. A proof of cash is wider. It reconciles the totals of money in and money out across the whole period, not just the ending balance, so transactions that were never recorded have nowhere to hide.
How we run it
In a Treewalk engagement the proof of cash sits in its own appendix and is built month by month, bank account by bank account. We reconcile two streams separately:
Receipts.
Total deposits per the bank against total revenue and other cash inflows per the books.
Disbursements.
Total withdrawals and payments per the bank against recorded expenses and other outflows.
What it catches
A clean proof of cash is quiet. A messy one tells a story:
- Revenue recorded that never arrived in the bank, or cash that arrived but was never recorded.
- Personal or related-party transactions moving through operating accounts.
- Timing games near period-end that shift income between years.
- In the worst cases, the early signals of fraud or skimming.
Because it works off third-party bank data rather than the company’s own ledger, a proof of cash is hard to manipulate. That independence is what makes it valuable to a buyer’s lender and diligence team.
Where it fits in the deal
The proof of cash supports the rest of the analysis. Once a buyer trusts that the cash is real, the EBITDA normalization adjustments built on top of those numbers carry far more weight. A normalized earnings figure that is not backed by proven cash is just an opinion.
Frequently asked questions
Is a proof of cash required in every deal?
Not strictly, but for owner-operated and cash-intensive businesses it is one of the highest-value procedures available. Where revenue runs largely through electronic channels and the books are clean, the work is lighter, but it is rarely skipped entirely because it is the most direct test of whether the numbers are real.
Does a proof of cash detect fraud?
It is not a fraud audit and provides no assurance, but it surfaces the patterns that warrant a closer look: gaps between recorded and banked revenue, unexplained disbursements, and round-number transfers. Many issues are first spotted here and then investigated.
How far back does it go?
Typically the same periods covered by the broader analysis, usually the two prior fiscal years and the trailing twelve months, so the cash picture lines up with the earnings picture. The applicable accounting framework, such as the standards from CPA Canada, governs how the underlying records should have been kept.
Where to next
If you are evaluating a target and want the cash confirmed before you rely on the earnings, our transaction advisory team builds the proof of cash into every Quality of Earnings report.
