Concept of Float in Cash Management

A cash manager, among other tasks, has to collect customers’ payments and concentrate them as well as managing the disbursements related to payments becoming due. In other words he manages the time line of short term cash flows and there under also those related to receivables. Connected with these activities there are often delays. In general a float represents a delay on the collection or on the disbursement of cash flow processes. Obviously, a cash manager’s target is to reduce delays in collections. Furthermore it is common practice that cash manager try also to maximize the float on disbursements within the credit terms agreed while exceeding these terms is, from an ethical point of view, questionable.

In relation to either collections or disbursements these delays can be divided into four types or components. While a payment is made by check and sent by mail we know there is a time delay until the payment, placed in the mail, is received. That is the so called mail float. Once the payment is received it has to be processed and deposited in the firm’s account. The processing float is usually longer and also best shown when the payment is made by check. In fact, when the mail arrives, the check has to be separated from the remittance advice and prepared for deposit. Only then it will be actually deposited at the payee’s bank. Hence, the time delay it takes, from receiving the check and actually depositing it goes under the name of processing float. Looking at the characteristics of the two components described, the mail and the processing float, we can infer that these are the same from the view of both the receiving party and the paying party. Stated differently, these two delays are generally the same from both perspectives. The remaining two components of float refer either to the perspective of the receiving party, such as the availability float, or to that of the paying party, like the clearing float. In fact the availability float is the time gap between the deposit of a check and the availability of the funds on the firm’s account. It depends on the conditions agreed upon by the bank and its customer, in our case the receiving party, known as “valuta” days. It ranges from same day up to two or three business days, depending on the banks clearing schedule and their connections to the clearing system. The clearing system through which the check, after deposit in the payee’s bank, is presented back to the payer’s bank on which it is drawn requires also some time. This “delay” goes under the name of clearing float and refers to the perspective of the paying party. Nowadays clearing systems are mostly paperless and electronically processed as well as supported by agreements between banks. Nonetheless, the clearing float often does not benefit the paying party with some delays in debiting its account. Banks, at least in some countries where laws permit or also bind to such procedures, use the issue date of the check or the presentation date at the payee’s (not payer’s) bank as the date on which the debit happens, even retroactively. Hence, from the perspective of the paying party the clearing float sometimes does not give any advantage while the delay is retroactively ruled out.

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