Custom Search

Cash Collection, Disbursement, and Float

Companies don`t keep their cash in a little tin box; they keep it in a bank deposit. To understand how they can make best use of that deposit, you need to understand what happens when companies withdraw money from their account or pay money into it

FLOAT

Suppose that the United Carbon Company has $1 million in a demand deposit (checking account) with its bank. It now pays one of its suppliers by writing and mailing a check for $200,000. The company`s records are immediately adjusted to show a cash balance of $800,000. Thus the company is said to have a ledger balance of $800,000. But the company`s bank won`t learn anything about this check until it has been received by the supplier, deposited at the supplier`s bank, and finally presented to United Carbon`s bank for payment. During this time United Carbon`s bank continues to show in its ledger that the company has a balance of $1 million. While the check is clearing, the company obtains the benefit of an extra $200,000 in the bank. This sum is often called disbursement float, or payment float.

Float sounds like a marvelous invention; every time you spend money, it takes the bank a few days to catch on. Unfortunately it can also work in reverse. Suppose that in addition to paying its supplier, United Carbon receives a check for $120,000 from a customer. It first processes the check and then deposits it in the bank. At this point both the company and the bank increase the ledger balance by $120,000:

But this money isn`t available to the company immediately. The bank doesn`t actually have the money in hand until it has sent the check to the customer`s bank and received payment. Since the bank has to wait, it makes United Carbon wait too usually 1 or 2 business days. In the meantime, the bank will show that United Carbon still has an available balance of only $1 million. The extra $120,000 has been deposited but is

not yet available. It is therefore known as availability float.

Notice that the company gains as a result of the payment float and loses as a result of availability float. The net float available to the firm is the difference between payment and availability float:

Net float = payment float Ј availability float

In our example, the net float is $80,000. The company`s available balance is $80,000 greater than the balance shown in its ledger.

PAYMENT FLOAT

Checks written by a company that have not yet cleared.

AVAILABILITY FLOAT

Checks already deposited that have not yet been cleared.

NET FLOAT Difference between payment float and availability float.