What is the float in finance (definition and example)?

By Indeed Editorial Team

Published 8 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Float is a financial term that refers to the time when a sum of money exists in multiple places simultaneously. Float occurs when an entity uses a cheque for payments, as the receiver considers the money in their possession though they haven't withdrawn it from the payer's account. If you're interested in financial literacy, you may want to learn more about float to understand how it affects investing, payments and insurance. In this article, we provide an answer to, 'what is the float in finance?', explain when the float occurs, discuss the importance and use of floats and show you how to calculate your account's float in four steps.

What is the float in finance?

Learning the answer to, 'what is the float in finance?' can help you improve your understanding of finance and accounting, which you may need if you aspire to work in business development or start your own company. In finance, the term 'float' refers to the money within the banking system that an institution counted more than once. Typically, this happens due to time gaps that sometimes occur when banks take too much time to register a deposit or withdrawal. These delays happen more often in countries that still process paper cheques. There are two main types of financial floats:

Holdover float

A holdover is a transaction that the bank hasn't processed yet. Floats of this type usually depend on an institution's mechanical or technological efficiency. In most cases, it takes around one business day to process these transactions.

Transport float

A transport float is the type of float that occurs when physical funds travel from one location to another. This most commonly refers to paper cheque. For example, a mail truck may carry those cheques or a bank vehicle may carry funds.

Related: How to become a financial analyst with no experience

When can floats occur?

Typically, the total amount of float increases during the winter. Factors that may impact this include difficult weather conditions and the holidays, which is the busiest time of the year for the transport industry. Usually, float is also bigger at the start of each week because that's when banks and institutions process cheques that people issued during the weekend. The three common forms of float that may occur include:

Disbursement float

The term 'disbursement float' refers to the time that it takes to create, mail, receive, deposit and present payments. Each time a company writes a cheque, it generates a disbursement float. For example, if a retail company writes a cheque to a supplier when the actual funds are still in the retailer's account, they create a disbursement float. Once the supplier deposits that cheque, the float decreases.

Collection float

Calculating collection float requires companies to consider the number of cheques they've collected that they haven't yet withdrawn from the payer's account. For example, when a retail customer makes a payment, they can write a cheque. That's when a company considers the payment complete. In reality, the cheque may take several business days to process, causing the collection float.

Net float

The term 'net float' refers to a situation, in which a company wants to check their financial situation, including how its funds can change, once all their cheques process completely. This includes both cheques that the company received and issued. If you want to calculate the net float, you can sum the two previous types of float. The formula for this looks like this:

Net float = collection float - disbursement float

For example, Company A's account balance is £20,000. In the last month, they've written several cheques that total at £5,000 (disbursement float), which the bank hasn't yet processed. The company has also deposited cheques that total at £12,000 (collection float), which haven't appeared on the entity's account yet. To calculate the net float, you can subtract the disbursement float from the collections float:

£12,000 - £5,000 = £7,000

You can now calculate the company's current account balance by adding the net float to the previous account balance:

£20,000 + £7,000 = £27,000

What's the importance of the financial float?

The float is an important concept to consider because it can significantly affect the financial industry and its particular elements, such as the viability of a company or interest on loans. Financial float is becoming less popular because more markets and countries choose to eliminate paper cheques entirely and focus on improving their digital payment processes. They do this, for example, by introducing instant mobile payments or encouraging businesses to accept cash or card payments only.

Many financial institutions still take advantage of the float. For instance, they can do this by continuing to earn interest on the loans that the system hasn't processed yet. Similarly, insurance companies use it to earn money on the premiums they collect before paying clients for damages. Some business owners may choose to float funds between their several companies to make one of them look more viable. Although the float is becoming less common with individual payments, it still occurs regularly when doing stock transactions.

Related: How to become a stock trader (with job and salary info)

The use of float

Although the financial float may not be ideal for some companies, it has its benefits. Individuals can use the float to their advantage if they've got a payment coming up but don't have sufficient funds in their accounts to cover that payment. For example, imagine that your bank expects that you to make a £200 payment for your credit card, which is due January 1.

On December 25, you can write and mail that amount, even if you don't currently have that much in your bank account, because you know that your employer wants to pay you on December 27. By issuing that payment earlier, you count on the fact that the financial institution wouldn't process the payment until January 1. This way, you'd have £200 worth of float, which is the time between issuing the payment and the time your bank clears it.

Related: A guide to what net annual income is and how to calculate it

How to calculate the financial float

Although float mostly happens when you use paper cheques, both digital and cheque transactions may influence the float in your account. To calculate the float for yourself, follow these steps:

1. Identify the current account balance

The first step to calculating your account's float is to check your available balance. Depending on how you use your account, you can do this by logging into your bank's account online or contacting the financial institution by phone. The current balance is the total amount that is immediately ready and which you can withdraw at any time.

Related: What is account receivable and why do businesses need it?

2. Consider the book balance the account

The book balance for the account is the balance that considers withdrawals and deposits that the bank hasn't fully processed yet. To determine this, you can look for pending transactions online or use online tools to review those transactions. It's important that you include both incoming and outgoing funds in this step. Your bank may choose to highlight only the ongoing ones, so it's best that you keep track of any incoming funds that you're expecting to receive separately.

3. Subtract the book from the current balance

After checking your account's current balance and identifying the book balance, you can use those numbers to calculate your account's financial float. To do this, you can simply subtract the book balance from the available balance. For instance, if your book balance totals at £6,123 and your available balance is £7,000 you can calculate the float like this:

Financial float = available balance - book balance

Your account's float = £7,000 - £6,123 = £877

4. Consider the average daily float for the account

The final step to calculating the float on your account is considering its average daily float. Doing this can help you understand the impact that the processing transactions have on the account. It may be the most time-consuming step of all four, as it requires that you gather information about the duration and amount for each float.

After that, you can multiply each amount by its duration, add them together and divide the amount by the total days in the financial period. For example, if your business has a float of £3,000 for seven days and £4,400 for five days within the month, its average daily float is £1,387. Here's the formula that you can use:

Average daily float = (amount of money x number of days) + (amount of money x number of days) / days in period

£1,387 = ((£3,000 x 7) + (£4,400 x 5)) / 31 days

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