What a quality of earnings readiness checklist should uncover
A quality of earnings process examines whether reported earnings are repeatable, supported by reliable accounting records, and consistent with the economics of the business. Buyers, lenders, and investors often look beyond the income statement. They may test revenue recognition, expense cutoff, working capital, customer concentration, related-party transactions, debt-like items, and the evidence supporting adjusted EBITDA.
This free checklist is designed for the preparation stage. It helps an owner or finance team identify likely accounting-cleanup work before a formal diligence process begins. It does not calculate a valuation or replace an independent quality of earnings engagement. Its purpose is to expose preventable gaps while management still has time to reconcile accounts, assemble schedules, and document its explanations.
Accrual accounting and cutoff
Revenue and expenses should be recorded in the period earned or incurred. Cash-basis timing, late bills, customer deposits, deferred revenue, and missing accruals can distort monthly earnings trends.
Balance-sheet reliability
Cash, receivables, payables, debt, fixed assets, shareholder loans, and intercompany balances should reconcile to supporting schedules. Unexplained balances reduce confidence in the financial statements.
Adjusted EBITDA support
Potential add-backs should be separated from recurring operating costs and supported with invoices, agreements, payroll records, or other evidence. Unsupported adjustments are more likely to be challenged.
Due-diligence documentation
Management should be able to explain material monthly changes and trace important balances to source records. An organized financial data room can reduce repeated questions and avoidable delays.
How to use your financial-readiness result
Prioritize accounting integrity
Resolve unreconciled accounts, cutoff issues, missing liabilities, and intercompany differences before focusing on presentation. Reliable underlying records matter more than a polished spreadsheet.
Build repeatable monthly schedules
Create consistent roll-forwards for working capital, debt, fixed assets, deferred revenue, and other material accounts. The objective is to make each balance explainable and reproducible.
Document EBITDA adjustments
Prepare an adjustment schedule that explains the business rationale, amount, period, recurrence, and supporting evidence for each proposed normalization or add-back.
Prepare the diligence trail
Organize financial statements, tax filings, bank and debt records, significant contracts, payroll reports, and adjustment support in an indexed data room with clear ownership.
Who benefits from this assessment?
The checklist is most useful for owners considering a business sale, companies preparing for private-equity or investor diligence, borrowers seeking growth financing, and multi-entity businesses that need cleaner management reporting. It can also help a finance team define the scope of pre-transaction accounting cleanup before external advisers begin detailed work.
Complete 12-point diagnostic checklist
Use this detailed checklist with the controller, bookkeeper or finance lead after completing the executive screen.
Monthly close
Financial statements are prepared consistently and closed on a predictable schedule.
Receivables and payables
AR and AP agree to complete supporting detail.
Cash and debt
Bank, credit-card, debt and shareholder-loan accounts are reconciled.
Accrual accounting
Revenue and expenses are recorded in the correct period.
Balance-sheet schedules
Deposits, deferred revenue, prepaids, accruals and fixed assets are supported.
Owner and related-party activity
Personal and non-operating costs are separated from normal operations.
Add-back evidence
Each proposed EBITDA adjustment has documents and a clear rationale.
Recurring versus one-time costs
Normal operating costs are not presented as non-recurring adjustments.
Market terms
Related-party rent, compensation and management charges are supportable.
Intercompany reporting
Connected-entity balances match and reporting is standardized.
Variance explanations
Management can explain material monthly changes.
Diligence records
Financial, tax, debt, contract and adjustment support is organized.
Quality of earnings readiness questions
Is this the same as a formal quality of earnings report?
No. This is an educational self-assessment. A formal quality of earnings engagement requires transaction-specific procedures, access to detailed records, and professional judgment about the sustainability and composition of earnings.
When should a business begin preparing for financial due diligence?
Preparation is generally more effective before a buyer, lender, or investor opens diligence. Starting early gives management time to close accounting gaps, produce comparable monthly reporting, and support proposed EBITDA adjustments.
What records commonly support adjusted EBITDA add-backs?
Support may include invoices, contracts, payroll records, general-ledger detail, board approvals, insurance documents, lease information, and evidence showing why an item is non-recurring, non-operating, or subject to normalization.
Does a high score mean the company is ready for a transaction?
Not necessarily. The score reflects self-reported answers and does not validate the underlying records. Even a strong result should be tested against reconciliations, source documents, accounting policies, and the specific requirements of the transaction.