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“Why not, I run millions of dollars through your bank?”

​​Have you ever heard the saying “Revenue for vanity and retained profits for sanity”?

If you have not, you may want to consider adopting that saying as your own personal philosophy for your business and personal finances. All too often I have heard business owners brag about the amount of revenue their company does per year or how many millions of dollars they run through the bank. Unfortunately, revenue is not as sexy to a bank as you may think. Revenue is a good indicator of how complex your business needs may be, but if you want to have leverage with any financial institution you need to build up your cash balances.

Banks crave cash on deposit; preferably in a checking account as opposed to a savings account. The cheaper for the bank the better. A customer’s cash on hand is what reduces the expense of providing loans by reducing the cost of funds. A bank can replace a customer who borrows millions much easier than they can replace a customer who has millions. If you have millions in revenue but only a few thousand on average deposit, you are likely costing the bank money to be a client. Hence the addition of banking service fees or minimum required deposit balances.

It’s also important to note where the money is held is very important. There is a big difference between the business holding the cash and the owner holding the cash personally. The customer is much more valuable, if those millions are retained on the business’s balance sheet as opposed to the owner’s personal financial statement. The owner who has a strong personal financial statement provides security only when the business needs to borrow money because they can often repay the loan if things go wrong. The business that retains the cash and has higher retained earnings equates to lower leverage. Lower leverage equates to more cushion for things to go wrong before they become debilitating to the business, reducing the banks lending risk and reduced cost of funding for loans. Lending risk is important because the FDIC requires a bank to retain more money in reserves. I’ll get into risk in another time. Too much to cover here.

To make a long story short, that old saying is true, cash is king and the rich get richer. Having cash provides leverage with any financial institution. That leverage will provide you with better pricing on your deposit accounts and loans; should you need one. If you want to improve your status with your financial institution, start retaining more cash. You will be surprised how quickly everything begins to cost less. The bank may even reward you with additional services at no additional costs. It’s not about how much you make but how much you keep.

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