CASH FLOAT

BINU JOSE DANTA TOMAS GIBY THOMAS

CONTENTS
Concept of Cash Float Different types or components of float Management of Cash Float

What is Float?
Bankers define floats as cash obligation that are in the process of collection. In simple words, Float is the difference between the cash balance appear in the passbook and that appear in the firms book.

Components/Types of Float
FLOAT Difference between cash

and bank records on account of non clearing of cheques.

NEGATIVE FLOAT -

POSITIVE FLOAT

Related to Bills Receivable

Related to Bills Payable.

Collection Float Invoicing Float Mail Float Processing Float Collection Float

Disbursement /Payment Float

Mail Float Processing Float Collection Float

Negative Float-Collection Float

It occurs when the firm receive payments. It is undesirable for a firm and it should be minimized. Collection float is the time which elapses between the time a payer deduct a payment from its accounts ledger and the time when the payee actually receives the funds in actual form.
Collection Float = Invoicing Float + Mail Float+ Processing Float+ Clearing Float

Four types of Collection Float 1. Invoicing Float Invoicing float is the time it takes for a firm to bill receivables.

The efficiency of the companys internal accounting and billing procedures

Effect of Invoicing Float

2. Mail Float
Mail Float is the time the firms bill spends in the mail on its way to the customer and the time the customers cheque spend in the mail on its way to the firm.
Bill Firm Cheque Customer

3.Processing Float When the firms office get the cheque and if the office machinery is lax, the cheque is deposited with the bank not on the same day but the next day.

It is the time between a firms receipt of a payment and its deposit of the cheque for collection

4. Clearing Float It is the time from when the bank accept a cheque for deposit to when it makes the funds available in the firms account

Bank

Firm

Collection Float
Customer Mail the cheque Mail Float Company receive the cheque Processing Float Company deposits the cheque Clearing Float

Bank process and clear the cheque

Positive Float- Disbursement /payment Float

Positive Float occurs when the firm makes the payment It allow the firm to maintain a control over the cash for a long period of time. Disbursement Float is the time between when a firm writes a cheque on available bank account fund and when the bank deduct the corresponding amount from the bank balance.
Firm Issue Cheque
Delay in Time for disbursement of cash

Supplier- Cash Credited to his bank account

Disbursement/Payment Float
Company Mail the cheque to Supplier Mail Float

Supplier receive the cheque Processing Float Supplier deposits the cheque Bank process and credits Supplier's account Clearing Float

Net Float Difference between Payment Float and Receipt Float

Net Float= Disbursement Float - Collection Float

Management of Float
1. Speeding Up Collection
The collection time comprises mailing time, Cheque processing delay, and the bank's availability delay. The time lag in collection of receivables can be considerably reduced by managing the time taken by postal intermediaries and banks.

For this purpose the company may also use lockboxes and centralisation banking system.

Lock Boxes system

Under a lock box system, customers are advised to mail their payments to special post office boxes called lockboxes, which are attended to by local collection banks, instead of sending them to corporate headquarters. The local bank collects the Cheque from the lock box once or more a day, deposits the Cheque directly into the local bank account of the firm, and furnishes details to the firm.

Concentration Banking A firm may open collection centres (banks) in different parts of the country to save the postal delays. Under this system, the collection centres are opened as near to the debtors as possible, hence reducing the time in dispatch, collection etc.

2. Delaying Payment Payable centralization Payable through Draft Controlled Disbursement Accounts Zero Balanced account:A firm does not keep any cash balance in the bank account. Cash is transferred only when the cheque is presented for the payment to the bank.

Thank you!