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A financial due diligence report connects historical earnings, working capital and reconciliation evidence. Use this worked company example to separate reported results, proposed adjustments and unresolved questions.
A financial due diligence report explains what historical earnings, working capital and supporting records establish about a company, and what still needs checking. Its value comes from the connection between a finding, its calculation and its evidence. A summary without those connections leaves the reviewer unable to challenge the conclusion.
State the entities, review periods, accounting basis, currency, information cutoff and procedures performed. Identify whether the supplied statements were audited, reviewed or prepared by management. Describe missing records and restrictions on access beside the affected findings.
Financial diligence commonly examines earnings quality, working capital and debt-related items, as described in BDO's discussion of financial due diligence. The analytical review illustrated here provides no audit assurance, legal opinion or certification that a transaction should proceed.
The report is the documented output. Due diligence financial analysis covers the underlying analytical work; keep the report focused on conclusions, support and open questions.
| Section | What to include | Evidence to retain |
|---|---|---|
| Scope and limitations | Entities, dates, procedures and unavailable records | File inventory and request log |
| Historical performance | Revenue, costs, margins and changes | Monthly ledger and statement ties |
| Earnings adjustments | Reported base, each adjustment and status | Journal references, invoices and contracts |
| Working capital | Defined balances, movements and seasonality | Aging reports and inventory register |
| Debt and cash | Recorded balances and unresolved classifications | Lender statements and bank reconciliations |
| Findings and follow-up | Evidence, implication, owner and next request | Supporting rows and response log |
Give each exhibit a source filename, worksheet, account mapping and period. A reviewer should be able to locate the rows without asking the writer to reconstruct the workbook.
Consider an illustrative Ohio components distributor, Cedar Bend Components. These are full-year ledger totals for the same business perimeter. Costs appear as positive expenses; all amounts are USD, with percentages shown to one decimal place.
| Historical measure | 2024 (USD) | 2025 (USD) | Calculation |
|---|---|---|---|
| Net revenue | 12,000,000 | 14,400,000 | Sales less credits and rebates |
| Cost of goods sold | 7,800,000 | 9,720,000 | Mapped direct cost accounts |
| Gross profit | 4,200,000 | 4,680,000 | Revenue minus cost of goods sold |
| Operating expenses before depreciation and amortization | 3,000,000 | 3,420,000 | Mapped operating expense accounts |
| Reported EBITDA | 1,200,000 | 1,260,000 | Gross profit minus preceding expense row |
Revenue growth = Current revenue / Prior revenue − 1
Gross margin = Gross profit / Revenue
Revenue growth is 14,400,000 / 12,000,000 − 1 = 20.0%. Gross margin moves from 4,200,000 / 12,000,000 = 35.0% to 4,680,000 / 14,400,000 = 32.5%, a decline of 2.5 percentage points.
The report can establish that revenue grew while margin narrowed. It cannot establish the cause from these totals alone. Request customer, product and monthly detail to distinguish pricing, purchase cost and mix; the gross profit margin method explains that separate test.
Suppose the records include relocation costs, and the business will also need standalone finance support after separation from its parent. Keep the historical cost and the prospective estimate in separate rows.
| Earnings bridge | Amount (USD) | Supporting evidence and status |
|---|---|---|
| Reported 2025 EBITDA | 1,260,000 | Agrees to historical table |
| Add back completed relocation expense | 180,000 | Posted invoices; recurrence still to assess |
| Deduct annual standalone finance support | −90,000 | Proposed future cost estimate; validate scope |
| Provisional adjusted EBITDA | 1,350,000 | 1,260,000 + 180,000 − 90,000 |
The arithmetic is complete; acceptance of the adjustments is not. Confirm that the relocation invoices were expensed in the reported base and that similar costs are unlikely to continue. Validate the support estimate against services the business actually needs. Present the result as provisional until those judgments are resolved.
Use a deliberately narrow operating definition here: net trade receivables plus inventory less trade payables. Cash, borrowing, taxes and other accruals are excluded from this exhibit; a transaction definition may include different accounts.
| Operating balance | December 31, 2024 (USD) | December 31, 2025 (USD) | Movement (USD) |
|---|---|---|---|
| Net trade receivables | 1,700,000 | 2,300,000 | 600,000 |
| Inventory | 2,000,000 | 2,600,000 | 600,000 |
| Trade payables | 1,200,000 | 1,500,000 | 300,000 |
| Defined operating working capital | 2,500,000 | 3,400,000 | 900,000 |
The movement proves itself: 600,000 + 600,000 − 300,000 = $900,000. More cash is tied up in these balances, but this is not a complete cash-flow statement. The SEC's financial statement guide distinguishes balance-sheet snapshots from cash movements over a period.
Review monthly balances before describing either year-end as normal. Link to the broader working capital definition rather than treating this narrow exhibit as the whole balance sheet.
The latest receivables reconciliation should show its deductions explicitly:
| Reconciliation step | December 31, 2025 (USD) |
|---|---|
| Gross open customer invoices | 2,340,000 |
| Less recorded allowance | −40,000 |
| Net receivables from supporting records | 2,300,000 |
| Net receivables in ledger | 2,300,000 |
| Difference | 0 |
A zero difference proves agreement between those records, not collectibility. Request subsequent receipts and dispute evidence before concluding that aged balances will convert to cash. Apply equivalent ties to inventory, payables, bank accounts and debt.
The diligence lead owns the finding. The controller owns ledger ties, operations explains inventory buildup, and credit staff explain unpaid invoices. Each unresolved item needs a requested document, owner and deadline.
Bring a sample of your own ledger, monthly statements and supporting balance exports: Covirage maps the columns, and its tools compute and check the historical comparisons and reconciliations. The external AI model explains the results with every figure traced to its rows; the appointed reviewers retain responsibility for scope and judgment. Create a free Covirage account, then set up your business and bring your files.
See Covirage for finance teams for the supporting management analysis workflow.
Start with monthly trial balances, general ledger exports, financial statements, invoice and credit memo registers, receivables and payables aging, inventory records, bank reconciliations and debt schedules. Request supporting contracts and invoices for unusual items. Identify the entity, period, currency and version of every file.
The appointed diligence lead owns the report and its scope. Company finance staff supply and reconcile records, business owners explain operating changes, and the transaction team evaluates implications. Assign each unresolved question to a named owner with a requested document and a response date.
Yes, provided the report presents a clear bridge between them. Show each adjustment separately, its evidence, its rationale and whether it is agreed or still proposed. Keep forward-looking standalone cost estimates distinct from corrections to the historical accounts and from completed historical transactions.