Float is the difference between the amount of checks written and deposited according to your own books or records, and the amount of those checks or deposits that have cleared your bank account. The following example should help you understand float.

 

For example, Hank's checkbook balance is $5,000 according to the check register he uses to record his checks and deposits. On the very same day, Hank's bank has a balance in his checking account of $9,000. This means that Hank has $4,000 in checks that he has written but that have not yet been cleared by his bank, or $4,000 of float.

Float is the product of the check-clearing procedures of your bank and the Federal Reserve. In the past, it may have taken up to a week or more for checks to clear through the banking system. Today however, electronic processing and changes at the Federal Reserve have considerably reduced the amount of time it takes for checks to clear through the banking system. But even today, you can still expect it to take one to three days for a check to pass through the system.

Many businesses neglect to consider float when they find themselves temporarily short of cash. You can actually use float to make payments with checks that create a negative balance in your checkbook register. For example, you may need to use float to take advantage of a supplier's trade discount, or to make other payments that need to be made immediately. There is one important rule to follow when using float — you must have the necessary cash inflows to cover the checks written before they clear your checking account.

 

Remember Hank, the guy from the example above? Hank's check register shows he has a balance of $5,000 in his checking account while his bank shows he actually has a balance of $9,000. The $4,000 difference is Hank's float. To take full advantage of his float, Hank could write out an additional $4,000 in checks if he can reasonably expect to deposit a $4,000 cash inflow before the additional checks clear his bank account.

Keep in mind that float is a two-way street, so to speak. If you write checks that clear your bank faster than your deposits clear, you'll create a negative float. The key to making float work in your favor is to accelerate your cash inflows and delay your cash outflows.