## Collection Float and Net Float

Checks received by the firm create collection float. Collection float increases book balances but does not immediately change available balances. For example, suppose GMI receives a check from a customer for \$100,000 on October 8. Assume, as before, that the company has \$100,000 deposited at its bank and a zero float. It deposits the check and increases its book balance by \$100,000 to \$200,000. However, the additional cash is not available to GMI until its bank has presented the check to the customer's bank and received \$100,000. This will occur on, say, October 14. In the meantime, the cash position at GMI will reflect a collection float of \$100,000. We can summarize these events. Before October 8, GMI's position is:

Float = Firm's available balance - Firm's book balance = \$100,000 - 100,000

GMI's position from October 8 to October 14 is:

Collection float = Firm's available balance - Firm's book balance = \$100,000 - 200,000 = -\$100,000

In general, a firm's payment (disbursement) activities generate disbursement float, and its collection activities generate collection float. The net effect, that is, the sum of the total collection and disbursement floats, is the net float. The net float at a point in time is simply the overall difference between the firm's available balance and its book balance. If the net float is positive, then the firm's disbursement float exceeds its collection float, and its available balance exceeds its book balance. If the available balance is less than the book balance, then the firm has a net collection float.

A firm should be concerned with its net float and available balance more than with its book balance. If a financial manager knows that a check written by the company will not clear for several days, that manager will be able to keep a lower cash balance at the bank than might be possible otherwise. This can generate a great deal of money.

For example, take the case of ExxonMobil. The average daily sales of ExxonMobil are about \$650 million. If ExxonMobil's collections could be speeded up by a single day, then ExxonMobil could free up \$650 million for investing. At a relatively modest .015 percent daily rate, the interest earned would be on the order of \$97,500 per day.

EXAMPLE ■ Staying Afloat

-:—' Suppose you have \$5,000 on deposit. One day, you write a check for \$1,000 to pay for books, and you deposit \$2,000. What are your disbursement, collection, and net floats?

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

20. Cash and Liquidity Management