An SBA cash proof tests whether the cash deposited into a business’s bank accounts supports the revenue reported in its financial statements and tax records. Before completing a cash proof, the analyst must also understand whether the business uses cash-basis or accrual-basis accounting. This can explain legitimate differences between reported revenue and bank deposits.
Under SBA guidance, the required Quality of Earnings scope includes a Cash Proof for the trailing twelve-month period and the prior two fiscal years. This makes bank-level testing an important part of lender financial due diligence.
At Peak Business Valuation, we perform SBA Quality of Earnings analyses to help identify and explain financial issues before an SBA transaction closes.
What Is the Purpose of an SBA Cash Proof?
An SBA cash proof connects reported revenue to actual deposits in the company’s bank accounts. An income statement shows how much revenue a business reported, but it does not show where the cash came from. Bank statements provide another source of information to test whether that revenue is supported. The goal is not to assume every deposit is revenue. Loan proceeds, owner contributions, transfers between accounts, sales tax, refunds, and other items can create differences between deposits and reported revenue.
The analyst identifies these items and prepares a reconciliation. A well-supported reconciliation helps distinguish normal timing differences from issues such as missing deposits, unreported accounts, duplicate revenue, or unsupported explanations.
Which Periods Are Tested?
The required scope generally covers the trailing twelve-month period and the prior two fiscal years. These periods should align with the financial statements, tax returns, and other records used in the Quality of Earnings analysis. Monthly testing can also be helpful because it may identify seasonality, merchant-processing delays, unusual deposits, and changes in collection patterns that might not be obvious from an annual comparison.
What Documents Are Needed for an SBA cash proof?
An SBA cash proof generally begins with complete bank statements for every business account used during the review period. The analyst will also typically need income statements, general ledgers, federal tax returns, IRS transcripts, and merchant-processing statements when applicable. The complete list of business bank accounts should also be confirmed with management. An account omitted from the initial request could contain legitimate business collections that otherwise appear as an unexplained revenue difference.
How Is an SBA Cash Proof Prepared?
The process generally starts with the total deposits shown in the bank records. The analyst then removes non-revenue deposits and accounts for legitimate timing or classification differences.
For example, assume bank deposits total $4.25 million while the income statement reports $4.00 million of revenue. The $250,000 difference is not automatically additional revenue. If the difference consists of a $150,000 line-of-credit advance, a $75,000 owner contribution, and $25,000 transferred from another company account, the adjusted deposits reconcile to the reported $4.00 million of revenue.
The opposite situation can also occur. If reported revenue exceeds adjusted deposits, the difference could be related to accounts receivable, checks in transit, or revenue recorded before the cash was collected. The important point is that significant differences should be explained and supported, not simply labeled.
What Are Common Reconciling Items?
Common non-revenue deposits include loan proceeds, owner contributions, transfers between accounts, tax refunds, insurance proceeds, and proceeds from asset sales. Other differences can result from merchant-processing fees, credit card timing, customer refunds, chargebacks, sales tax, and accounts receivable. For example, if a $100,000 deposit is identified as a “transfer,” the analyst should generally trace it to the originating account. Otherwise, the same cash could potentially be counted twice.
What Issues Can a Cash Proof Identify?
An unexplained difference between reported revenue and cash collections can indicate potential issues with the company’s financial reporting. These may include aggressive revenue recognition, unrecorded refunds, excluded bank accounts, weak bookkeeping controls, or revenue that cannot be supported.
However, a difference does not necessarily mean there is a problem. For example, an accrual-basis contractor may recognize revenue before collecting the cash. If the accounts receivable and subsequent collections support the revenue, the difference may simply be a normal timing issue. The results should always be considered in the context of the company’s accounting method and business model.
How Does Cash Proof Affect Normalized Earnings?
A cash proof does not replace the income statement or the broader Quality of Earnings analysis. Instead, it provides an additional test of whether the revenue used to calculate normalized earnings is supported. If material revenue cannot be reconciled, the analyst may need additional documentation or may need to adjust earnings or identify a limitation in the analysis.
This can be important for an SBA lender because the Quality of Earnings conclusion may affect the lender’s assessment of cash flow and debt service capacity. Peak’s article on what a Quality of Earnings analysis includes explains how revenue testing fits with add-backs, owner compensation, margin analysis, and working capital.
How Can You Avoid SBA Cash Proof Delays?
The best way to avoid delays is to provide complete documentation from the beginning. Provide native PDF bank statements for every month and every business account. Include all pages and identify significant transfers, financing proceeds, owner contributions, and other unusual deposits. It is also helpful to prepare a simple schedule showing each bank account and the months provided. This can make it easier to identify missing statements before the analysis begins.
The Quality of Earnings checklist can help organize the broader document request. The cash proof periods should also align with the financial information the analyst uses for the SBA business valuation.
SBA Cash Proof and Quality of Earnings
An SBA cash proof provides an important connection between reported revenue and actual cash activity. It gives lenders another way to determine whether the financial performance presented by the seller is supported by the company’s underlying records.
At Peak Business Valuation, we perform SBA Quality of Earnings analyses and SBA business valuations for privately held businesses. As part of an SBA QofE, a financial analyst performs a cash proof. It is more than a reconciliation of deposits; an SBA cash proof tests whether the revenue supporting the transaction can be traced back to the company’s underlying financial activity.
