How do I check whether a business actually makes money?

A profit and loss statement is an assertion. Whether a business actually makes money is a question you answer by checking that assertion against records the seller did not prepare specifically to show you.

Start with three independent sources

Pull bank statements for the operating account, the point-of-sale or invoicing system’s sales reports, and the corporate tax return, all for the same period. Each is produced independently and for a different purpose, so they are harder to align falsely than a single set of books. Real profit shows up consistently across all three; a story that only holds together in one place is the one to question.

Separate accounting profit from cash profit

Net income on a financial statement includes non-cash items — depreciation, accruals, timing adjustments — that do not represent money actually collected. Build a simple cash-basis view alongside the accrual one: cash collected from customers, less cash actually paid out for costs, over the same period. A business can show an accounting profit while its bank balance tells a different story, and the gap is usually explained by working capital rather than anything improper, but it needs explaining either way.

Watch the trend, not one year’s number

• Compare at least two to three consecutive years, not a single strong year
• Check gross margin stability month to month, not just the annual average
• Look at whether owner draws or discretionary add-backs are growing faster than reported revenue
• Confirm seasonal patterns repeat the same way year over year

What normalization can and cannot fix

Sellers and brokers commonly present adjusted earnings that add back the owner’s salary, personal expenses run through the business, and one-time costs. That process is legitimate when the add-backs are genuine and documented, but it is not a substitute for confirming the underlying revenue is real. Verify the add-backs against receipts and payroll records rather than accepting a list at face value.