What is Float in Finance : Types & Importance

Key Takeaways
 

• It happens when funds are recorded in two places at the same time, like when a cheque is written but not yet cleared.
   
• Businesses can track disbursement and collection float to know which money is temporarily available or pending.
   
• Understanding float helps investors and companies make better decisions about spending, saving, and investing.

Float in finance is the brief moment when the same money appears in two places, such as when a cheque is written but not yet cleared. The payer still has the funds, and the receiver thinks they’ve received it.

For example, you write a cheque to a shop. The shop counts the money as received, yet your bank hasn’t removed it from your account. That temporary overlap is called a float.

Float plays a powerful role in areas like insurance and investing, helping companies make the most of funds that aren’t yet due for payment. Understanding how float works can reveal smart ways money moves and grows behind the scenes.

In this blog, we will explore how float works, the different types of float, and how businesses and investors can use it to their advantage.

What Is Float in Finance?

In finance, float happens when the same amount of money appears in two places at once. This usually occurs due to delays in processing payments or transferring funds. Float can affect both individuals and businesses, especially when using cheques or manual payments.

To illustrate, consider a scenario where you issue a cheque to a shop. The shop records the payment as received, yet your bank hasn't deducted the amount from your account. This temporary overlap is known as a float.

Bonus Tip: float has played a significant role in financial systems. In 1973, the daily float average in the United States was approximately $2.7 billion. By 2000, this figure had decreased to $774 million per day, primarily due to advancements in electronic payments and cheque imaging technologies.

There are two main types of processing, float and three different forms of float that show how money moves.

Types of Processing Float

Processing float occurs when there is a delay in the movement or clearing of funds due to banking or logistical processes. Understanding the different types helps businesses and individuals manage cash flow more effectively.

Recognising the types of processing float allows organisations and individuals to plan payments and collections better, minimising the risk of unexpected cash flow issues.

Forms of Float

Float can take several forms depending on how and where the money is in transit. Understanding these forms helps businesses track cash flow accurately and optimise the use of funds.

Knowing the forms of float allows businesses to manage timing differences between payments and receipts, helping them maintain better control over working capital.

Float tends to rise during busy times like holidays or bad weather, when more people make payments and transport slows down. It also increases at the start of the week, as weekend cheques begin to clear.

Why Does Financial Float Matter?

Float might sound like a tricky word, but it’s just about money being “in between.” That small delay when money leaves one place and reaches another can be quite useful.

Imagine you send a cheque for your rent today, but it takes two days to reach your landlord and another day to clear from your bank. In those three days, the money is still sitting in your account. That’s float, and you can use that time to make sure your salary arrives first!

Banks love float too. While they wait to move your money, they still earn interest on it. It’s like the bank gets a few extra pennies while holding onto your cash for just a little longer.

Insurance companies do something clever as well. They collect money from customers (called premiums) and invest it while waiting to pay out claims. That waiting time is floating, and it can earn them a lot of money.

Bonus Tip: Even in the stock market, float plays a role; money can seem to move before it’s settled. Understanding float helps you see how money works behind the scenes.

Mastering the Art of Financial Float

Think of financial float as the quiet space between what your account says you have and what you can use. This gap can work in your favour if you know how to handle it. Let’s walk through how to calculate it with clarity and confidence.

Step One: Find Out What You Can Spend

Begin with your available balance. This is the money sitting in your account that you can use right now. No waiting. No processing. Just real funds at your fingertips. Check it online or ask your bank directly. Ignore any transactions that haven’t cleared yet.

Step Two: Discover the True Picture with Your Book Balance

Now look at your book balance. This includes everything in motion, such as pending transfers, scheduled payments, or deposits still being processed. You can use your records or your bank’s digital tools to get this number. It’s the more complete picture of your money story.

Step Three: Do the Simple Subtraction

Here comes the magic. Subtract your book balance from your available balance to see your financial float.

Let’s say your available balance is ₹12,395.61 and your book balance is ₹11,263.55. The float is the difference between the two.

Your float is ₹1,132.06

This means you temporarily have ₹1,132.06 more in available cash than your records show. Use this insight wisely.

Step Four: Work Out Your Average Daily Float

If you want to get clever with your cash flow, calculate your average daily float. This tells you how much float you typically hold each day over some time.

Imagine this. You had ₹2,000 floating for eight days and ₹5,400 floating for six days in a 31-day month. Multiply each amount by its days, add them together and divide the total by 31.

Here’s the maths

(2,000 × 8) plus (5,400 × 6) equals 48,400

Now divide 48,400 by 31

Your average daily float is ₹1,561.29

This number helps you understand how much wiggle room you have in your account every day.

Why It Matters?

Understanding your financial float gives you control. It helps you avoid overdrafts, plan payments better, and make the most of your available funds. It’s a small detail that can make a big difference in how smoothly your finances run.

Real-Life Examples of Financial Float

Understanding financial float becomes easier when we see it in action. Below are two examples showing how different organisations experience float in everyday business.

Example One: A Catering Business Balances Its Float

A catering business has been busy with events and expenses. The accountant is reviewing both payments made and money received to work out the float.

Outgoing Payments (Disbursement Float)Incoming Payments (Collection Float)

Disbursement float occurs when a payment has been initiated but the funds have not yet left the payer’s account. Tracking these payments helps businesses understand cash that is technically still available for use.
 

Monitoring disbursement float enables a company to plan its cash flow effectively, knowing which funds are still in transit and can be utilised temporarily.

Collection float occurs when a company has received payments, such as cheques, but the funds have not yet cleared into its account. Tracking this helps businesses know which expected cash is still in transit.
 

Keeping track of collection float allows companies to manage incoming funds efficiently, ensuring accurate cash flow planning while waiting for payments to be fully credited.

Now, to calculate the net float:

Net Float = Collection Float − Disbursement Float

Net Float = ₹7,500 − ₹3,800 = ₹3,700

The accountant finds that the business holds a positive float of ₹3,700, which means more money is incoming than outgoing at that moment. This gives the business breathing space for future payments or investments.

Example Two: An Electric Company Awaits Cheque Clearance

An electric company receives customer payments at the beginning of the month. While online transfers clear quickly, cheques take time.

This week, the company received 46 cheques that are still being processed. Until those cheques clear, the amount sits as a float in their records.

Total float represents the sum of payments that are still in transit or being processed, giving businesses a clear picture of cash temporarily unavailable for use.
 

Monitoring total float helps businesses identify funds that are technically still available but not yet usable, allowing for better cash management and financial planning.

So, the accountant notes that the company holds a temporary float of ₹3,046.58. Once processed, the float will disappear as the money moves into the usable account balance.

Why These Examples Matter?

Both businesses show how financial float gives short-term flexibility. Whether it’s planning purchases or handling delayed payments, float helps maintain smooth operations without surprises.

Conclusion

Financial float gives organisations a short-term advantage by bridging the gap between payments made and payments received. By tracking float carefully, businesses can manage their cash flow more effectively, avoid unnecessary borrowing, and make better financial decisions. Whether you run a small catering company or a large utility firm, understanding your float helps you stay in control of your money.

FAQ’s

1. Why do companies track float separately from cash?
Companies track float to see how much money is in motion but not yet usable. It helps them plan payments wisely and avoid overspending or overdrafts.

2. Can a float show if a business is managing payments smartly?
Yes. A healthy float shows that a business is timing payments and collections well. It reflects good financial planning and strong control over cash flow.

3. How does float affect financial decision-making?
Float gives a business extra time before money moves. Knowing this, managers can make smarter choices about spending, investing, or delaying certain payments.

4. Do all payment types create float?
No. Instant payments like UPI or online transfers rarely create float. Cheques and some bank transactions take time to clear and usually cause a float.

5. Can float vary during the year?
Yes. Float changes with business cycles. During festive seasons or year-end sales, incoming and outgoing payments rise, often increasing the float for short periods.
 

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LoansJagat Team

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