Here's the single most important diligence question:

Is the Company's financial information accurate?

Most financials from small businesses are unaudited.

So an independent CPA has never validated them.

Even if a company is "reviewed" instead of audited, the procedures are limited.

Reviews rarely catch anything.

So - during a limited due diligence time frame, how can you make sure the financial information essential to the acquisition thesis is accurate?

Enter the Cash Proof analysis.

What is it?

An analysis matching financial statements

directly to bank statements.

We compare the inflows and outflows per the bank

to the amounts per the financial statements,

and look for any differences.

Bank statements are considered third-party evidence.

The bank is maintaining the data (not the Company),

So the data is much more trustworthy.

Why perform one?

The analysis catches duplicate transactions.

As well as unrecorded ones.

For example, if a Company made $500,000 in a month,

but only $400,000 came into the bank account.

This indicates revenue is inflated.

Difficulties in Preparation:

I highly recommend utilizing a specialist,

specifically a due diligence / QoE CPA,

for two reasons:

1. Highly technical:

– Internal transfers – Timing differences – Intra-period changes – Non-cash transactions – Accounting adjustments

2. Informs other diligence procedures:

– Isolates timing differences between periods – Helps understand the flow of transactions – Gives more context to diligence findings – Shows QoE/NWC adjustments

It's not worth your time to learn to do one properly.

The Main Limitation

A cash proof tells us that: – Total inflows match total revenue – Total outflows match total expenses

when considering the corresponding change in the BS.

However, the analysis does not do one thing:

Tell us if items were classified correctly.

For example, It will not show a marketing expense was incorrectly booked as a personnel expense.

What is an accepted difference?

Cash proofs are more difficult than they sound –

You are trying to recreate the company’s accounting.

But, there are usually 10K+ or even 1M+ transactions.

Ultimately you will not match everything.

Also, there are diminished returns:

Time (and costs) to further decrease the difference,

won't bring much more comfort / value

after a certain point.

Most providers say a difference of <5% is acceptable

We always aim for under 2% for extra comfort.

Message me "Cash Proof"

to learn how we leverage technology to do this:

– Faster – More accurately

Saving you money and increasing confidence