What is Cash Float? - Definition & Types

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  • 0:02 Cash Float
  • 0:24 Disbursement &…
  • 1:32 Net Float
  • 2:35 Managing Your Float
  • 3:23 EDI & Check 21
  • 4:08 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

When you write or deposit a check, the transaction takes time to process before the money is paid from or available in your account. Businesses are the same. In this lesson, we'll discuss types of cash float and how it is changing with technology

Cash Float

The easiest way to define cash float is to say it is the total value of checks you've written or received, but have not yet come out or been credited to your bank account. Many factors determine how long that period is and actually, if a business is large enough, they can use cash float to manage their cash flow.

Disbursement & Collection Float

Cash float is divided into two types: disbursement float and collection float. Disbursement float starts when Company A writes a check to Company B and puts it in the mail. At that point, the available balance in Company A's bank account doesn't decrease, but the book value of their bank account decreases, because Company A tracks their outflows on their own. Once Company B receives the check and deposits it, Company B's bank will request the funds from Company A's bank, and when that happens, the disbursement float time period ends. The total value of all those checks at any point in time is the disbursement float.

When Company B receives the check, records that they have the payment, and takes it to the bank, the collection float clock starts. At that point, the book value of Company B's bank account has increased, since the check has been recorded, but the available funds in the bank have not increased, because the funds haven't been verified by the bank and transferred over. When they are - usually between two and four days later - the actual cash is in Company B's account, and the collection float clock stops. The total value of all those checks at any point in time is the collection float.

Net Float

As has probably already occurred to you, most companies have both disbursement float and collection float at the same time. That's why we have the concept of net float. If you take your collection float amount and subtract your disbursement float amount, you'll be able to reconcile your bank account balance to the book value of that account.

When doing the math to calculate your disbursement and collection float, they should both be positive numbers. Recall that your disbursement float is the sum of all the checks you have written, but have not yet cleared your bank account. Adding all those checks together will result in a positive number. The same is true for your collection float. The sum of the amounts of the checks you have collected and deposited to the bank but which have not yet been added to your account is your collection float - also a positive number.

However, when you calculate your net float by using the formula collection float - disbursement float, you may end up with a positive or a negative number. If it's positive, your bank account will increase; if it's negative, your bank account will decrease.

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