What it means
When you write a cheque, your accounting records show the money gone immediately. Your bank, however, only reduces your balance when the payee deposits the cheque and it clears.
The amount sitting in between is called disbursement float (money you have paid out on paper but that has not yet left your bank account). The same thing works in reverse for incoming money.
When a customer's cheque is deposited, your records show cash received, but the bank may hold the funds for a day or more until the cheque clears. This is collection float (money you have received on paper but cannot yet spend).
Float matters because it affects cash management and interest. A business that pays by cheque and takes several days to clear keeps its money working a little longer, which is a small benefit.
A business waiting for customer cheques to clear loses the use of that money, which is a small cost. Float has become shorter over the years because electronic payments and image-based cheque clearing settle much faster.
Even so, card settlements, international transfers and cross-border cheques can still take days. Treasury teams track float closely when cash is tight or when interest rates are high.
Float also shows up in how companies measure working capital efficiency. A treasurer may calculate the average number of days a payment spends in transit and compare it with the terms agreed with suppliers.
If the gap is widening, it can point to a slow bank, a slow mail route or customers who are deliberately delaying. There is also a nuance around control.
Relying on float to stretch cash can look clever, but it can lead to overdrafts if payees bank cheques sooner than expected. Some banks also treat deliberate float-chasing as a misuse of the account.
In practice
Real-world examples
Example 1
A wholesaler pays 40 suppliers by cheque every Friday, totalling $180,000. Most payees bank their cheques on Monday or Tuesday, so the wholesaler's bank balance stays high for three or four days. The finance manager uses a float forecast so the account never dips below its minimum balance.
Example 2
A consulting firm invoices clients monthly and receives most payments by cheque. Customers' cheques take two business days to clear, which leaves $75,000 of money on paper but not yet usable. The firm asks clients to pay by electronic transfer to cut that waiting time. Within a quarter, the average delay between invoice payment and usable cash falls from four days to under one.
Example 3
A retailer accepts card payments, and the card processor settles takings two days after each sale. A $50,000 weekend of sales is recorded straight away but only appears in the bank on Tuesday. The owner schedules supplier payments around the settlement date rather than the sales date. This avoids overdraft fees on the Monday morning payroll run and keeps the relationship with the bank smooth.
Think of it
Bank float is the time your deposited money sits unavailable while banks process it.
Formula
Calculation
Net float = Bank balance - Book balance
Book balance = Bank balance - Outstanding cheques + Deposits in transit
Suppose a company's bank statement shows a balance of $120,000. It has written $30,000 of cheques that have not yet been cashed and has banked $10,000 of receipts that have not yet cleared. Book balance = 120,000 - 30,000 + 10,000 = $100,000. Net float = 120,000 - 100,000 = $20,000, which means the bank shows $20,000 more than the company's own records. If the company can earn 5% a year on surplus cash and the float lasts 6 days, the value of that float is about 20,000 x 5% x 6 / 365 = $16.44.Case study
Seen in the real world
Fernhill Catering is a fictional events company that pays most of its suppliers by cheque and bills clients on 30-day terms. One quarter, the finance manager noticed that the bank balance always looked about $45,000 healthier than the internal cash book. She assumed the extra cash was available and approved a large equipment purchase.
When the supplier banked its cheques two days earlier than usual, the account went overdrawn and the bank charged fees. This illustrative story shows why a float schedule should be part of every cash forecast. The finance manager now lists every outstanding cheque by date and amount, and she subtracts the total from the bank balance before approving any large spend. Fernhill now plans around the cash book balance and treats the bank balance only as a cross-check.
Watch out
Common mistakes
- Treating the bank balance as the amount available to spend. Outstanding cheques mean part of that balance is already committed.
- Ignoring float when forecasting cash. Timing gaps can swing the available balance by thousands of dollars from one day to the next.
- Believing electronic payments have no float at all. Card settlements and cross-border transfers can still take days to arrive.
Questions
People also ask
Is bank float the same as the bank's float?
No, bank float in this sense is the timing gap in your own account, while a bank's float can also mean the money it holds between receiving and paying out funds.
Does float earn interest?
Disbursement float can let you keep money in an interest-bearing account a little longer, but the gain is usually small and not worth the overdraft risk.
How do I reduce collection float?
Ask customers to pay by electronic transfer, use lockbox services or accept card payments, all of which shorten the time before funds are usable.
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