## Float Management

Float management involves controlling the collection and disbursement of cash. The objective in cash collection is to speed up collections and reduce the lag between the time customers pay their bills and the time the cash becomes available. The objective in cash disbursement is to control payments and minimize the firm's costs associated with making payments.

Total collection or disbursement times can be broken down into three parts: mailing time, processing delay, and availability delay:

1. Mailing time is the part of the collection and disbursement process during which checks are trapped in the postal system.

2. Processing delay is the time it takes the receiver of a check to process the payment and deposit it in a bank for collection.

3. Availability delay refers to the time required to clear a check through the banking system.

Speeding up collections involves reducing one or more of these components. Slowing up disbursements involves increasing one of them. We will describe some procedures for managing collection and disbursement times later. First, we need to discuss how float is measured.

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Measuring Float The size of the float depends on both the dollars and the time delay involved. For example, suppose you mail a check for \$500 to another state each month. It takes five days in the mail for the check to reach its destination (the mailing time) and one day for the recipient to get over to the bank (the processing delay). The recipient's bank holds out-of-state checks for three days (availability delay). The total delay is 5 + 1 + 3 = 9 days.

In this case, what is your average daily disbursement float? There are two equivalent ways of calculating the answer. First, you have a \$500 float for nine days, so we say that the total float is 9 X \$500 = \$4,500. Assuming 30 days in the month, the average daily float is \$4,500/30 = \$150.

Alternatively, your disbursement float is \$500 for 9 days out of the month and zero the other 21 days (again assuming 30 days in a month). Your average daily float is thus:

Average daily float = (9 X \$500 + 21 X 0)/30 = 9/30 X \$500 + 21/30 X 0

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

678 PART SEVEN Short-Term Financial Planning and Management

This means that, on an average day, your book balance is \$150 less than your available balance, representing a \$150 average disbursement float.

Things are only a little more complicated when there are multiple disbursements or receipts. To illustrate, suppose Concepts, Inc., receives two items each month as follows:

Processing and

Amount availability delay Total float

Total \$8,000,000 \$60,000,000

The average daily float is equal to:

Total float

Total days \$60 million

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