What it means
Payments do not move instantly in every system. A cheque has to be posted, opened, banked and cleared, and even electronic payments can take time to settle depending on the banks and payment schemes involved.
Float is generally split into three parts. Mail float is the time a payment spends in transit, processing float is the time the business takes to record and deposit it, and availability float is the time the bank takes to clear the funds and make them usable.
The cost is simple: while money is in float, the business cannot spend it, repay debt with it or earn interest on it. For a company that collects large volumes, even one extra day of float ties up a big sum.
Businesses reduce collection float in several ways. They encourage electronic payment, use lockbox services where a bank collects and processes cheques directly, deposit receipts the same day and negotiate faster availability with their bank.
Float is also a feature of customer behaviour. Customers who pay by cheque near the due date and post it late create more float than those who pay by bank transfer on the day the invoice is issued.
Disbursement float is the opposite number. It is the delay between a company writing a cheque and the funds leaving its account, and companies sometimes benefit from it, although managing it too aggressively can harm supplier relationships.
In practice
Real-world examples
Example 1
A magazine publisher receives thousands of subscription cheques each month by post. By moving to a bank lockbox, it cuts two days of processing time and releases cash to repay a short-term loan sooner. The interest saving more than covers the lockbox fee.
Example 2
A utility company offers a small discount for customers who pay by direct debit. Over a year the share of electronic payments rises, and the average float falls from four days to one. The reduced float releases a useful sum of working capital. The utility treasurer reports the change to the board as a saving.
Example 3
A wholesaler asks customers to pay by bank transfer instead of cheque. The cash arrives on the due date, and the finance team can plan payments to suppliers with more certainty. The customers like the convenience of a standing bank transfer too.
Think of it
Collection float is like ordering a parcel online. Even though you clicked buy and your money left your account, the item takes several days to arrive on your doorstep. You own it, but you cannot use it yet.
Formula
Calculation
Average float balance = Average daily collections x Average float days
Annual cost of float = Average float balance x Interest rate
A distributor collects $50,000 a day on average, and the delay between customers paying and cleared funds is 2.5 days. Average float balance = $50,000 x 2.5 = $125,000. If the company could otherwise earn or save interest of 6%, the annual cost is $125,000 x 0.06 = $7,500. Cutting the float by one day would free up $50,000 and save $3,000 a year.Case study
Seen in the real world
Riverton Wholesale is an illustrative, fictional food distributor that collected about $80,000 a day, mostly by cheque. The finance manager noticed that the company relied on its overdraft each month, even though the invoices were being paid on time.
Studying the process, she found that cheques sat in a post office box for a day, were banked two days after opening and then took another two days to clear, so total float was five days, or $400,000 of cash tied up.
She introduced a lockbox, same-day deposits and a discount for electronic payment. In this illustrative result, float fell to two days, releasing about $240,000 and saving interest of roughly $14,400 a year at a 6% rate, and the overdraft was no longer needed. She also built the float days into the weekly cash forecast so the figure stayed visible.
Watch out
Common mistakes
- Assuming that a customer who has paid has put money in your account, when the funds may still be in transit.
- Counting uncleared cheques as available cash in the cash forecast.
- Ignoring the cost of float because each day seems small, when the total can be large for high-volume businesses. The cost grows with the volume of payments and the length of the delay.
Questions
People also ask
Is float always bad?
Collection float is a cost for the receiver, but for the payer it can be a benefit, which is why disbursement float is sometimes managed deliberately.
How can a small business reduce float?
Ask customers to pay electronically, deposit cheques as soon as they arrive and use mobile deposit where your bank offers it. Keep a record of the deposit date and reference for reconciliation.
Is float the same as working capital?
No, float is the specific delay in turning payments into usable cash, while working capital is the broader difference between current assets and current liabilities.