CASH FLOATBINU JOSE

DANTA TOMASGIBY THOMAS

CONTENTS

• Concept of Cash Float• Different types or components of

float• Management of Cash Float

What is Float?

• Bankers define floats as cash obligation that are in the process of collection.

• In simple words, Float is the difference between the cash balance appear in the passbook and that appear in the firm’s book.

Components/Types of FloatFLOAT – Difference between cash and bank records on account of non clearing of cheques.

NEGATIVE FLOAT - Related to Bills Receivable

POSITIVE FLOAT – Related to Bills Payable.

Collection Float• Invoicing Float•Mail Float• Processing Float•Collection Float

Disbursement /Payment Float•Mail Float• Processing Float•Collection Float

Negative Float-Collection Float• It occurs when the firm receive payments.• It is undesirable for a firm and it should be

minimized.• Collection float is the time which elapses between

the time a payer deduct a payment from its accounts ledger and the time when the payee actually receives the funds in actual form.

Collection Float = Invoicing Float + Mail Float+ Processing Float+ Clearing Float

Four types of Collection Float1.Invoicing Float • Invoicing float is the time it takes for a firm to

bill receivables.

The efficiency of the company’s internal

accounting and billing procedures

The efficiency of the company’s internal

accounting and billing procedures

Effect of Invoicing

Float

2. Mail Float Mail Float is the time the firm’s bill spends in the

mail on its way to the customer and the time the customer’s cheque spend in the mail on its way to the firm.

Firm Customer

Bill

Cheque

3.Processing Float When the firm’s office get the cheque and if

the office machinery is lax, the cheque is deposited with the bank not on the same day but the next day.

It is the time between a firm’s receipt of a payment and its deposit of the cheque for collection

It is the time between a firm’s receipt of a payment and its deposit of the cheque for collection

4. Clearing Float• It is the time from when the bank accept a

cheque for deposit to when it makes the funds available in the firms account

Bank Firm

Collection Float

Customer Mail the cheque

Company receive the cheque

Company deposits the cheque

Bank process and clear the cheque

Mail Float

Processing Float

Clearing Float

Positive Float- Disbursement /payment Float• Positive Float occurs when the firm makes the

payment• It allow the firm to maintain a control over the cash

for a long period of time. Disbursement Float is the time between when a firm

writes a cheque on available bank account fund and when the bank deduct the corresponding amount from the bank balance.

Firm –Issue Cheque

Supplier- Cash Credited to his bank account

Delay in Time for disbursement of

cash

Disbursement/Payment Float

Company Mail the cheque to Supplier

Supplier receive the cheque

Bank process and credits Supplier's

account

Supplier deposits the cheque

Mail Float

Processing Float

Clearing Float

Net Float• Difference between Payment Float and

Receipt Float

Net Float= Disbursement Float - Collection Float

Management of Float

1. Speeding Up Collection • The collection time comprises mailing time, Cheque

processing delay, and the bank's availability delay.• The time lag in collection of receivables can be

considerably reduced by managing the time taken by postal intermediaries and banks.

For this purpose the company may also use lockboxes and centralisation banking system.

Lock Boxes system• Under a lock box system, customers are advised to mail

their payments to special post office boxes called lockboxes, which are attended to by local collection banks, instead of sending them to corporate headquarters.

• The local bank collects the Cheque from the lock box once or more a day, deposits the Cheque directly into the local bank account of the firm, and furnishes details to the firm.

Concentration Banking• A firm may open collection centres (banks) in

different parts of the country to save the postal delays.

• Under this system, the collection centres are opened as near to the debtors as possible, hence reducing the time in dispatch, collection etc.

2. Delaying Payment• Payable centralization• Payable through Draft• Controlled Disbursement Accounts• Zero Balanced account:- A firm does not keep any cash balance in the

bank account. Cash is transferred only when the cheque is

presented for the payment to the bank.

Thank you!