Cash float refers to the discrepancy between the cash balances reported in a business's accounting records and the amount of cash the business actually has available in its bank accounts. Properly managing cash float is crucial for companies to ensure smooth operations, maintain proper cash flow, and have access to readily available funds when needed.
There are a few common situations that create cash float:
One major source of cash float stems from delays in check processing. When a customer writes a check, the funds show as available in their accounting records. However, there is typically a lag of a few days before the checks are cashed and cleared from the payer's bank account. During this float period, the business may show more cash than it actually has on hand.
In retail and restaurant businesses, the term "cash float" can refer to the amount of physical cash kept in registers for making change for customers. This is not technically a discrepancy, as the cash is physically there, just allocated for change-making rather than general spending. The float represents the starting amount, not accounting for any cash received from sales.
Enterprise businesses that handle money transfers on behalf of customers can also experience cash float. Money coming in from customers may sit in the company's intermediary accounts for a few days before being transferred to its final destination. During that brief period, the funds are shown as assets on the company's books before being sent out.
The duration of cash float periods depends primarily on two variables: processing delays and transportation issues.
Banks process batches of checks at scheduled times, leading to backlogs after weekends or holidays. More checks are also processed earlier in the week, especially on Tuesdays. In addition, the volume of checks increases dramatically in the peak December holiday season.
Winter weather can readily delay mail service and the physical transit of checks from one location to the next. This transportation float exacerbates other processing delays.
While some cash float is inevitable, prudent financial management can mitigate risk:
Meticulously documenting every incoming and outgoing cash transaction, and when each change occurs, keeps accounting records accurate. Without proper tracking, discrepancies can lead to overdrafts or other cash flow issues.
When reconciling accounting books, businesses should calculate the current cash float and factor it into projections. The formula is: Float = Total Bank Balances - Cash Balance in Books. This reveals upcoming liabilities.
Watching Accounts Payable and Accounts Receivable helps businesses identify which obligations are still outstanding or pending. This knowledge aids in preventing potential misalignments between accounting records and bank balances.
When handled properly, routine cash float should not detrimentally impact operations:
While funds may technically be "in transit", analysis of historical ratios and durations can give insight into a business’ true accessible liquidity levels at any given point.
By keeping precise accounting records, tying out the balance sheet frequently, and tracking cash commitments, businesses can avoid unexpected shortages or gaps between outflows and inflows.
Overall, managing standard cash float profiles and abnormalities allows companies to calibrate their financial planning, budgets, and growth strategies for stability.
In summary, cash float is an inevitable result of delays in the payments processing cycle. But skilled accounting practices can render its impacts minimal through reconciliation controls and analysis of past trends. With mature cash float management, enterprises can focus less on rectifying account balances, and more on sustaining operations. The business banking process always involves some float, but sound data tracking renders it a peripheral financial factor.