What it means
Payments are not instantaneous. When a business posts a cheque to a supplier, days pass before the supplier receives it, deposits it, and the supplier's bank presents it to the business's bank for payment.
During that time the money is still in the business's account, earning interest or reducing an overdraft, even though the business has recorded the payment. That is disbursement float, and businesses have historically used it deliberately, timing cheque runs and choosing payment methods to keep cash for longer.
The reverse applies to receipts. A business deposits a customer's cheque and records the cash, but its bank may not make the funds available for two or three days, and if the cheque bounces the credit is reversed.
That is collection float, a cost to the business, and managing it means getting customers to pay by faster methods, depositing promptly and using lockbox or remote deposit services that shorten the cycle. Electronic payments have compressed float dramatically.
Real-time and same-day transfer systems settle in hours or seconds, and card payments settle to the merchant within a day or two. Cheque float, which once ran to a week or more, is now measured in a day or two in most banking systems, and in many countries cheques are disappearing altogether.
The concept remains important for businesses that still receive or issue cheques, for international payments that pass through correspondent banks, and for understanding why the ledger and the bank statement differ at any point in time. For the banking system as a whole, float is money that has been credited to one account and not yet debited from another, so it briefly exists twice.
Central banks measure it and treat it as a factor in money supply. For an individual business the practical points are simpler: know how long each payment method takes to clear in each direction, do not spend deposited funds that have not cleared, and reconcile the bank account so that float items are identified rather than mistaken for errors.
In practice
Real-world examples.
Example
A company times its weekly cheque run for Friday, knowing the cheques will not be presented until the following Wednesday, and uses the float to cover Monday's payroll.
Example
A retailer depositing cheques finds its bank makes funds available on the second working day, and treats deposits as uncleared in its cash forecast until then.
Example
An exporter receiving a cheque drawn on a foreign bank waits three weeks for collection and asks future customers to pay by wire transfer.
Think of it
“Bank float is the time your deposited money sits unavailable while banks process it.
Formula
Calculation
Net Float = Disbursement Float minus Collection Float
where Disbursement Float = Value of payments recorded in the ledger but not yet cleared from the bank, and Collection Float = Value of receipts recorded in the ledger but not yet available in the bank
Average Float Value = Average daily value of payments x Average clearing days
Worked example. A wholesaler pays suppliers by cheque and receives customer payments by cheque and transfer. On a given day:
- Cheques issued to suppliers that have not yet cleared: $180,000 (disbursement float)
- Customer cheques deposited but not yet available: $65,000 (collection float)
- Net float = $180,000 minus $65,000 = $115,000
The wholesaler's ledger shows a bank balance of $40,000. The bank's records show $155,000, because $180,000 of outgoing cheques have not been presented and $65,000 of deposits are already credited (subject to clearance). The $115,000 net float is money the business can, for a few days, treat as available, and the bank reconciliation lists every item that makes up the difference.
Annual value: the wholesaler issues about $9,000,000 of supplier cheques a year, clearing on average 4 days after issue. Average disbursement float = $9,000,000 / 365 x 4 = $98,600. At an overdraft rate of 9%, the float saves about $8,900 a year in interest. If suppliers pushed the company to pay electronically, the float would vanish and the company would need to fund that $98,600 permanently.
Collection side: customers pay $10,000,000 a year, of which $3,000,000 by cheque clearing in 3 days. Average collection float = $3,000,000 / 365 x 3 = $24,700. Moving those customers to electronic payment would release about $24,700 permanently and remove bounced-cheque risk.Case study
Seen in the real world.
A building contractor ran its cash on the assumption that supplier cheques took a week to clear and had built the practice of writing cheques on Friday against Monday's expected receipts. When its bank moved to a faster clearing system, cheques began clearing in two days. The first week, $210,000 of cheques cleared on Tuesday against receipts that arrived Wednesday, the account went $150,000 overdrawn beyond its limit, and the bank bounced three cheques to key subcontractors.
Relationships that had taken years to build were damaged in an afternoon. The contractor rebuilt its cash forecast on actual clearing times, stopped relying on float, arranged a proper overdraft facility for timing gaps, and moved supplier payments to scheduled electronic transfers so that it, not the clearing system, controlled the timing. The finance manager's remark was that the company had been borrowing from the banking system without a loan agreement, and the terms had changed without notice.
Watch out
Common mistakes.
- Relying on float to fund the business. Clearing times shorten without warning, and the strategy fails at the worst moment.
- Spending deposited funds before they have cleared. A bounced cheque reverses the credit, and the business may already have paid the money away.
- Treating float items as errors on the bank reconciliation. They are timing differences and should be listed as such, then checked off when they clear.
Questions
People also ask.
What is the difference between disbursement float and collection float?
Disbursement float benefits the payer: money recorded as paid but not yet taken from the account. Collection float costs the payee: money recorded as received but not yet available.
Does float still exist with electronic payments?
Much less. Real-time transfers settle in seconds; card settlements take a day or two; international payments through correspondent banks can still take several days.
Is using float legal?
Timing payments to use normal clearing periods is legal and routine. Deliberately writing cheques against funds that do not exist, expecting to cover them with later deposits, can be fraud.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%