Disbursement Float

Checks written by a firm generate disbursement float, causing a decrease in the firm's book balance but no change in its available balance. For example, suppose General Mechanics, Inc. (GMI), currently has $100,000 on deposit with its bank. On June 8, it buys some raw materials and pays with a check for $100,000. The company's book balance is immediately reduced by $100,000 as a result.

GMI's bank, however, will not find out about this check until it is presented to GMI's bank for payment on, say, June 14. Until the check is presented, the firm's available balance is greater than its book balance by $100,000. In other words, before June 8, GMI has a zero float:

float

The difference between book cash and bank cash, representing the net effect of checks in the process of clearing.

Ross et al.: Fundamentals I VII. Short-Term Financial I 20. Cash and Liquidity I I © The McGraw-Hill of Corporate Finance, Sixth Planning and Management Management Companies, 2002

Edition, Alternate Edition

676 PART SEVEN Short-Term Financial Planning and Management

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

Disbursement float = Firm's available balance - Firm's book balance = $100,000 - 0 = $100,000

During this period of time that the check is clearing, GMI has a balance with the bank of $100,000. It can obtain the benefit of this cash while the check is clearing. For example, the available balance could be temporarily invested in marketable securities and thus earn some interest. We will return to this subject a little later.

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