What it means
Float comes in two directions. Disbursement float arises when a company has recorded a payment out but the money has not yet left its bank account; collection float arises when a customer's payment has been recorded as received but has not yet cleared.
The practical importance is that only one of those balances can be spent. A business relying on its own book balance can go overdrawn without realising it, while one relying only on the bank balance may think it is richer than it is.
Measuring float is simple arithmetic: multiply the average daily value of payments in transit by the average number of days they take to clear. Netting the two directions gives net float, the true difference between bank and book positions.
Electronic payments have shrunk float dramatically. Cheques that once took four or five days to clear have been replaced by card and bank transfers that settle within a day, so the deliberate management of float is far less profitable than it once was.
There is an important line not to cross. Managing float by timing payments sensibly is ordinary treasury practice, but writing payments against funds that do not exist and relying on clearing delays is cheque kiting, which is fraud.
In practice
Real-world examples.
Example
A wholesaler pays suppliers by cheque on the 25th of each month while collecting from customers by direct debit. The clearing mismatch leaves roughly $80,000 of net float in its account, which the treasurer sweeps into an overnight deposit rather than treating as spendable cash.
Example
A charity running a mail appeal receives donation cheques in batches that take three days to clear. Its finance officer reports the bank balance rather than the book balance to trustees, and the two figures diverge by more than $50,000 during the appeal.
Example
A restaurant group moves customers from cheque payments to card payments and watches its collection float fall from four days to one. Working capital improves by around $120,000 without any change to sales or pricing.
Think of it
“Float is shares available to trade-what the public can actually buy.
Formula
Calculation
Float = Average daily payment value x Average days in transit. Net float = Disbursement float - Collection float.
A distributor writes an average of $25,000 of supplier payments each day, and those payments take an average of 4 days to leave its account.
Disbursement float = $25,000 x 4 = $100,000.
It receives an average of $30,000 a day from customers, and those receipts take 2 days to clear.
Collection float = $30,000 x 2 = $60,000.
Net float = $100,000 - $60,000 = $40,000. If the book balance is $310,000, the bank will be showing $310,000 + $40,000 = $350,000.
That $40,000 sits in the bank account permanently as long as payment patterns hold. At a 5% deposit rate, it earns $40,000 x 5% = $2,000 a year, which is real money but plainly not a business strategy in itself.Case study
Seen in the real world.
The following is a fictional illustration. Pallister Print Group, an invented commercial printer, kept running into unexpected overdraft charges despite showing a healthy book balance every month end.
The controller mapped both sides of the flow and found the problem. Customer payments were arriving by cheque and taking five days to clear, giving roughly $210,000 of collection float, while the company's own supplier payments left almost instantly by bank transfer. Net float was strongly negative, so the bank balance was consistently below the book balance by around $180,000.
Pallister fixed it in two moves: it offered a small early settlement discount for customers paying electronically, and it moved supplier payments onto scheduled transfers rather than same-day ones. Within a quarter the negative float had shrunk to roughly $40,000 and the overdraft charges stopped. The illustrative point is that float is not a trick to exploit but a timing gap to understand and control.
Watch out
Common mistakes.
- Treating float as free money to spend. It exists only because payments are in transit, and every dollar of it is owed to or from someone.
- Reconciling to the book balance alone. Cash forecasts should run off the cleared bank position, with float shown separately as a timing difference.
- Confusing cash float with a company's free float of shares. They are unrelated concepts that happen to share a word.
Questions
People also ask.
Why does float still exist if payments are electronic?
Batch processing, weekends, public holidays and cross-border settlement cycles all create delays even in modern payment systems.
Is negative net float a problem?
It means the bank balance sits below the book balance, so it needs to be funded, usually through a working capital facility or by speeding up collections.
How do I reduce collection float?
Move customers onto direct debit or card, invoice promptly and electronically, and bank any remaining cheques daily rather than weekly.
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