What it means
Float is simply money in transit between two parties. Mail float measures the postal leg specifically: the envelope is sealed and posted, then carried, sorted and delivered.
For a business that still collects a meaningful share of receipts by cheque, this can easily be two to five days of cash sitting in a sorting office doing nothing. It matters because cash you cannot see is cash you cannot use.
Every day of mail float is a day of forgone interest, a day of extra drawing on a revolving credit facility, or a day closer to a covenant test with a weaker cash balance. Individually these amounts look trivial, but multiplied by daily receipts across a year they become real money.
Treasurers attack mail float mainly through lockbox arrangements, where customers post payments to a post office box close to their own region and the bank collects and banks them directly. Regional lockboxes shorten the postal distance and remove an internal handling step at the same time, so they cut mail float and processing float together.
The more decisive answer is to remove paper from the process altogether. Direct debit, bank transfer, card on file and instant payment rails reduce mail float to zero, which is why many finance teams offer a small early-settlement discount to persuade remaining cheque payers to switch.
There is a mirror image worth knowing. Your own outgoing cheques create disbursement float that works in your favour, because the cash stays in your account until the cheque is presented.
Deliberately stretching that by posting from distant locations is called remote disbursement, and banks and counterparties take a dim view of it.
In practice
Real-world examples.
Example
A building supplies wholesaler serving three states finds that cheques from its most distant customers take five days to arrive, while local ones take two. It opens a lockbox in the distant state, and average collection time across the whole book falls by nearly two days without any change to customer payment habits.
Example
A membership organisation collects annual subscriptions by post each January. Because renewals all arrive in the same fortnight, the finance director models mail float carefully to work out the precise week the cash will land, rather than assuming it is available on the renewal date.
Example
A manufacturer negotiating a new borrowing facility discovers that trimming mail float and processing float together would shorten its cash conversion cycle by four days. That reduces its peak borrowing requirement enough to lower the facility size it needs, saving several thousand dollars a year in commitment fees.
Think of it
“Mail float is the time checks spend traveling through the postal system before arriving.
Formula
Calculation
Cash Tied Up in Mail Float = Average Daily Collections x Mail Float Days
Annual Cost of Mail Float = Cash Tied Up x Annual Interest Rate
A regional distributor collects $250,000 per day by cheque, and its average mail float is 3 days.
Cash tied up = $250,000 x 3 = $750,000.
At an annual borrowing rate of 5%, the cost is $750,000 x 0.05 = $37,500 per year.
The treasurer sets up two regional lockboxes, which cuts average mail float to 1.5 days.
New cash tied up = $250,000 x 1.5 = $375,000, and the new annual cost is $375,000 x 0.05 = $18,750.
The annual saving is $37,500 - $18,750 = $18,750. If the lockbox service costs $9,000 a year in bank fees, the distributor is still $9,750 better off, and it has permanently released $375,000 of working capital.Case study
Seen in the real world.
This is an illustrative, fictional case. Harbour Lane Supplies, an invented industrial parts distributor, ran a single accounts receivable office and asked all customers to post cheques to it. Sales had grown to roughly $65,000,000 a year, but the finance team could never explain why the bank balance always looked worse than the ledger suggested.
A treasury review measured the gap. Cheques from customers more than a day's post away were taking four to five days to arrive, then another day to be batched and banked. In total, the business was carrying close to $1,100,000 of receipts permanently in transit, funded by a revolving facility at 6%, which cost roughly $66,000 a year.
Harbour Lane moved to three regional lockboxes and offered a 0.5% discount for payment by bank transfer. Within a year, two-thirds of customers by value had switched to electronic payment and average mail float on the remainder had halved. The illustrative point is that float is not an accounting curiosity; it is borrowed money paying for envelopes to travel.
Watch out
Common mistakes.
- Treating the postmark date as the date you have the cash. The payment is only useful to you once it has arrived, been processed and cleared, which can be a week later.
- Measuring only mail float and ignoring the rest. Processing float inside your own office and clearing float at the bank often add as much delay again, so the full collection float is the number that matters.
- Assuming float is irrelevant because interest rates are low. Even at modest rates, float ties up working capital that could reduce borrowing, and it distorts short-term cash forecasts regardless of the rate.
Questions
People also ask.
How is mail float actually measured?
Compare the postmark or payment date recorded by the customer with the date of receipt across a sample of payments, then take a value-weighted average rather than a simple average.
Does electronic payment eliminate float entirely?
Mail float disappears, but some clearing float can remain depending on the payment rail, since certain transfers still take a day or two to settle.
Is it acceptable to slow down your own payments to gain disbursement float?
Paying to agreed terms is normal practice, but deliberately routing payments to delay presentation damages supplier relationships and can breach banking agreements.
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