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In business terms, float refers to the time delay between the movement of funds from one account to another. There are several instances in which float occurs, all of which involve managing cash effectively.
One example of float occurs during the processing time for checks: when a person writes a check those funds exist as float in their account, because the funds technically belong to the recipient, but the check has not yet been cashed.
The term cash float can also be used to reference a small amount of cash kept on hand by a company to cover minor expenses and day-to-day operations. This type of cash float is typically used for small, immediate purchases where using regular payment methods may not be practical or efficient.
Float can also occur when businesses move money on behalf of their customers, in the period of time where the funds are held in the business’ accounts before being transferred to their end destination. However, it is important to recognize here that in these types of instances, customer funds are generally not commingled with the business’ funds—rather they are held in separate accounts. In many instances, businesses can actually leverage cash float to generate revenue via smart and secure investments.
Similarly, cash float can refer to the time lag between when a payment is received by a business (such as customer payments or incoming funds) and when it is available for use or ready for withdrawal. For example, when a company receives a payment via credit card, there may be a delay between the time the transaction occurs and when the funds are actually deposited into the company's bank account.
In general, businesses need to closely monitor their cash float to ensure that they have sufficient liquidity to cover operational expenses during this processing period. It becomes even more critical for businesses with high transaction volumes, as delays in processing can lead to temporary cash flow constraints.
In all cases, cash float management is crucial for businesses to ensure smooth operations, maintain proper cash flow, and have access to readily available funds when needed. Efficient management of cash float can contribute to overall financial stability and support a business’ ability to meet its financial obligations effectively.
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Explore the fundamentals behind back office finance processes and the accounting principles underlying them.
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