What is the difference between a Cash Proof and a Quality of Earnings?

A Cash Proof and Quality of Earnings (QoE) are two different financial analyses used in the due diligence process. Generally speaking, a cash proof focuses on confirming the accuracy of reported cash balances whereas a quality of earnings analysis assesses the sustainability and reliability of a company's earnings by identifying and adjusting for non-recurring or unusual items (and are almost always required for a bank to debt-finance the deal). 

Cash Proof:

• Purpose: An analysis that verifies the cash balances of the business. A cash proof aims to confirm that the company's reported cash balances are accurate and that there are no undisclosed liabilities or unusual cash movements. Typically, a cash proof is appropriate for smaller businesses with less complex financials and the Buyer just wants to see the company is actually making money.  
• Process: During the cash proof analysis, the acquiring or investing party typically reviews bank statements, cash receipts, cash disbursements, and other financial records to reconcile the reported cash balances with the actual cash on hand. It also looks for any unusual transactions or discrepancies that might indicate financial irregularities.
• Importance: Cash proofs are more appropriate when a full fledged QofE might not be required due to the simplicity of a company’s financial statements, willingness to purchase the business on a cash basis, or the acquisition being predicated more so on the target’s strategic value to the acquirer. 

Quality of Earnings (QoE):

• Purpose: Quality of earnings assess the sustainability and reliability of a company's earnings and underlying financial performance. It aims to identify any unusual or non-recurring items in the financial statements that might impact future profitability. QofE’s are a critical item typically for obtaining debt financing for a deal since all lender agreements are based off the performance of the business on a GAAP basis. 
• Process: In a QoE analysis, financial statements, income statements, and balance sheets are scrutinized to identify items such as one-time gains or losses, accounting adjustments, changes in accounting policies, or any other factors that might distort the true earnings picture. The goal is to provide a clearer understanding of the company's core, recurring earnings.
• Importance: A QoE is vital for assessing the long-term financial health and viability of the target company; acquiring parties want to ensure that the reported earnings are sustainable and that there are no hidden issues that could negatively impact future performance.

In summary, cash proof focuses on confirming the accuracy of reported cash balances and the absence of undisclosed liabilities, while quality of earnings analysis assesses the sustainability and reliability of a company's earnings by identifying and adjusting for non-recurring or unusual items. Cash proofs are more appropriate when a full fledged QofE might not be required due to the simplicity of a company’s financial statements, willingness to purchase the business on a cash basis, or the acquisition being predicated more so on the target’s strategic value to the acquirer.