FLOAT,DISBURSEMENT FLOAT AND COLLECTION FLOAT

FLOAT,DISBURSEMENT FLOAT AND COLLECTION FLOAT

FLOAT

The difference between bank cash and book cash, representing the net effect of
cheques in the process of clearing is called float.

DISBURSEMENT FLOAT

Cheques written by a firm generate disbursement float, causing a decrease in the
firm’s book balance but no change in its available balance.

ABC LTD has $150,000 on deposit with its bank.
• On June 15, it buys some raw material and pays with a cheque for $150,000. reducing
the book balance by $150,000 immediately.
• ABC’s bank is unaware of this activity until the cheque is presented, say June 29 and
the firm’s available balance is greater than it’s book balance by $150,000.
• Before June 15, the ABC’s float is zero:
Float = Firm’s available balance –Firm’s book balance
= $150,000 – 150,000 = 0
• Form June 15 to June 29, the position is:
Disbursement Float = Firm’s available balance –Firm’s book balance
= $150,000 – 0 = 150,000

COLLECTION FLOAT

Cheques collected by the firm create collection float, which increases book balances
but does not immediately change available balance.

NET FLOAT

In general, the firm’s payment activities generate disbursement float and its collection
activities generate collection float.

• The net effect, the sum of both floats is the net float, equal to the overall difference
between the firm’s available balance and its book balance.

• If net float is positive, then the firm’s disbursement float exceeds its collection float
and its available balance exceeds its book balance, and vice versa.

• Suppose you have $50,000 on deposit.
• One day, you write a cheque for $10,000 and deposit $20,000.
• What are your disbursement, collection and net floats?
• After writing the cheque, you show a balance of $40,000 on your books, but bank
shows $50,000 while the cheque is clearing. So you have a disbursement float of
$10,000
• Depositing $20,000 increases the book balance to $60,000, but the available balance
remains the same until the cheque clears. So collection float is -$20,000.
• Net float = $10000 + (-20,000) = -$10,000