What it means
In treasury, float is the gap between the moment a payment is initiated and the moment the money is usable. When you pay by cheque, the funds may leave your books immediately yet stay in your bank account for a few days until the cheque clears.
When you receive a cheque, the amount may appear in your records before the bank makes the money available. There are two types.
Disbursement float is cash that has been paid out in the books but not yet withdrawn from the bank, which gives the payer extra use of money. Collection float is cash that has been received in the books but is not yet available in the bank, which delays the receiver's use of money.
Net float is the difference between the two. A positive net float means the company's bank balance is higher than its book balance, and a negative one means the opposite.
Treasurers try to lengthen disbursement float and shorten collection float, within the bounds of the law and good supplier relations. Faster electronic payments have reduced float in many countries, but it has not vanished.
Cheques, international transfers and card settlement still take time. Finance teams must account for it when forecasting cash, or they may think they have more money than is really available.
In a shop, cafe or market stall, the float is a set amount of coins and notes placed in the till at the start of the day so that staff can give change. At the end of the day, the float is counted and set aside, and the rest is takings.
This second meaning is simple but important for controlling cash handling. Companies can manage float actively with tools such as lockboxes, where customers send payments to a bank-controlled post box so that deposits are processed faster.
Electronic payments, direct debits and same-day settlement also reduce delays. Each tool has a cost, so treasurers compare the saving against the fee.
In practice
Real-world examples
Example 1
A property management company pays contractors by cheque and knows that most take about 5 days to clear. During that time the money stays in its account. The treasurer includes the outstanding cheques in the daily cash forecast so that the balance is not overstated.
Example 2
A coffee shop places a $200 float of small notes and coins in the till each morning. At closing, the manager counts the till, removes the $200 float, and banks the rest. The sales figures for the day are clear.
Example 3
An exporter receives international cheques that take up to 10 days to clear. The finance manager asks customers to switch to wire transfers. The change reduces the exporter's collection float and releases cash for stock purchases.
Think of it
Cash float is the time money spends in transit-between being sent and being available for use.
Formula
Calculation
Net float = Disbursement float - Collection float
Cost of collection float = Average collection float x Annual interest rate
Worked example: a company has $40,000 of cheques written but not yet cleared (disbursement float) and $25,000 of deposits in transit (collection float).
Net float = $40,000 - $25,000 = $15,000.
The company also receives $200,000 in cheques every business day, and each takes 2 days to become available.
Step 1: Average collection float = $200,000 x 2 = $400,000.
Step 2: At an opportunity cost of 5%, the yearly cost is $400,000 x 5% = $20,000.
Speeding up the collection by one day would save about $10,000 a year.Case study
Seen in the real world
Lakeside Pharmacy Group is an illustrative, fictional chain of 20 pharmacies. Each day it deposits about $60,000 in takings and cheques, and it takes an average of 3 days for funds to be available. That meant an average of $180,000 was always in transit.
The finance manager worked out that the delay cost the group about $180,000 x 4% = $7,200 a year in lost interest. She switched to a bank offering same-day availability on card receipts and local-branch cheque deposits. Collection float fell to an average of $60,000, saving around $4,800 a year.
The illustrative lesson is that float is an invisible cost. Shortening it can turn idle in-transit money into cash that is working for the business. The group now reports float in its weekly cash forecast, so that the finance director sees available funds rather than only the book balance.
Watch out
Common mistakes
- Treating the book balance as the cash you can spend, when uncleared cheques and deposits in transit affect what is really available.
- Forgetting that float works both ways, helping the payer and hurting the receiver.
- Counting the till float as part of the day's sales, which inflates revenue.
Questions
People also ask
What causes float?
Processing time for cheques, bank transfers, card settlements and international payments creates a delay between payment and availability.
Is it ethical to exploit float?
Using normal payment timing is fine, but deliberately delaying a payment beyond the agreed terms can breach contracts and harm relationships.
How much should a retail till float be?
It depends on the shop, but it should cover typical change needs, such as a few hundred dollars in small notes and coins.
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