What is “float?”

Why is it of concern to the financial manager? Discuss the advantages and/or disadvantages to receivables float and payables float.

Float is money that is en route between parties. One party has written a check and released it to the other party (normally by putting the check in the mail), however the second party does not yet have the money to spend. We distinguish between receivables float, incoming checks that have not yet been collected, and payables float, outgoing checks that have not yet been paid. From a strict time value of money perspective, receivables float is bad we always want to receive money sooner, and payables float is good we do want to pay later. However, there may be other costs associated with float that must also be taken into account. These include the administrative costs of accelerating collections and delaying disbursements, and the more difficult to measure costs associated with customer and supplier satisfaction. Ultimately, every payment between two companies is a process involving both organizations. The best value of float is one that minimizes the joint costs of the two parties.

Be the first to comment on "What is “float?”"

Leave a comment

Your email address will not be published.


This site uses Akismet to reduce spam. Learn how your comment data is processed.