Info

$2 million

So, on an average day, there is $2 million that is uncollected and not available.

Another way to see this is to calculate the average daily receipts and multiply by the weighted average delay. Average daily receipts are:

Total receipts $8 million

Average daily receipts =-=-= $266,666.67

Total days 30

Of the $8 million total receipts, $5 million, or % of the total, is delayed for nine days. The other % is delayed for five days. The weighted average delay is thus:

Weighted average delay = (5/8) X 9 days + (3/8) X 5 days = 5.625 + 1.875 = 7.50 days

The average daily float is thus:

Average daily float = Average daily receipts X Weighted average delay [20.2] = $266,666.67 X 7.50 days = $2 million

Some Details In measuring float, there is an important difference to note between collection and disbursement float. We defined float as the difference between the firm's available cash balance and its book balance. With a disbursement, the firm's book balance goes down when the check is mailed, so the mailing time is an important component in disbursement float. However, with a collection, the firm's book balance isn't increased until the check is received, so mailing time is not a component of collection float.

This doesn't mean that mailing time is not important. The point is that when collection float is calculated, mailing time should not be considered. As we will discuss, when total collection time is considered, the mailing time is a crucial component.

Also, when we talk about availability delay, how long it actually takes a check to clear isn't really crucial. What matters is how long we must wait before the bank grants availability, that is, use of the funds. Banks actually have availability schedules that are used to determine how long a check is held based on time of deposit and other factors.

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

VII. Short-Term Financial Planning and Management

20. Cash and Liquidity Management

© The McGraw-Hill Companies, 2002

CHAPTER 20 Cash and Liquidity Management

Buildup of the Float

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