Proof of cash, explained simply
Accounting records can be wrong or manipulated, but bank statements are an independent source. The test confirms that recorded sales became deposits and that recorded payments left the account, and it is one of the strongest procedures in a quality of earnings.
It is performed in four columns for each month: opening balance, receipts, disbursements and closing balance. Differences must be explained. Transfers between the company’s own accounts, loan proceeds, owner contributions and refunds are excluded.
Revenue to cash
IllustrativeAlder Creek Manufacturing, FY2025, $ millions
A $0.2 million difference between expected receipts and bank deposits requires explanation.
Worked example
| Alder Creek, FY2025 | $ millions |
|---|---|
| Revenue per the books | 42.0 |
| Add: opening receivables | 4.7 |
| Less: closing receivables | (7.1) |
| Expected customer receipts | 39.6 |
| Actual customer deposits per bank statements | 39.4 |
| Unexplained difference | (0.2) |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
The gap is traced to credits given to customers in January against December sales, which were not recorded in 2025, so revenue is reduced. The increase in receivables from $4.7 million to $7.1 million also confirms the longer payment terms identified elsewhere in diligence.
Why it matters in a deal
A proof of cash identifies inflated revenue, unrecorded expenses and cash leaving the business without a record. Lenders often expect one in a QoE.
Red flags
- Deposits consistently lower than recorded sales
- Unexplained transfers to accounts outside the company
- Missing bank statements