Working Capital Management

 Self-Paced Overview


Float is defined as the difference between the book balance and the bank balance of an account. For example, assume that you go to the bank and open a checking account with $500. You receive no interest on the $500 and pay no fee to have the account.

Now assume that you receive your water bill in the mail and that it is for $100. You write a check for $100 and mail it to the water company. At the time you write the $100 check you also record the payment in your bank register. Your bank register reflects the book value of the checking account. The check will literally be "in the mail" for a few days before it is received by the water company and may go several more days before the water company cashes it.

The time between the moment you write the check and the time the bank cashes the check there is a difference in your book balance and the balance the bank lists for your checking account. That difference is float. This float can be managed. If you know that the bank will not learn about your check for five days, you could take the $100 and invest it in a savings account at the bank for the five days and then place it back into your checking account "just in time" to cover the $100 check.

Time Book Balance Bank Balance
Time 0 (make deposit) $500 $500
Time 1 (write $100 check) $400 $500
Time 2 (bank receives check) $400 $400

Float is calculated by subtracting the book balance from the bank balance.

Float at Time 0:  $500 − $500 = $0

Float at Time 1:  $500 − $400 = $100

Float at Time 2:  $400 − $400 = $0 is maintained by Dr. Sharon Garrison
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