Managing Cash Flow

26 Understanding Cash Management
The amount of the company’s disbursements float can be determined by
sophisticated studies and analyses, or it can be done much more simply (though
less precisely) by studying bank statements and determining over a period of several
months the time between issuance and deduction from the account for large
vendor payments, and the total amount of checks that remain outstanding at each
month end. These procedures will give an order of magnitude to the ongoing and
month-end amounts of float, which will be, if not precisely accurate, at least a
close approximation of reality.
The amount of collection or availability float can be determined by talking
with the depository bank to find out its policy on clearing time—that is, the time
it takes before deposits are available for use. The time can vary from as little as
immediate availability to as long as 10 days, two weeks, or possibly more. Each
bank has its own policy. However, a company with a large enough account may
be able to negotiate a faster availability time.
A summary of some of the principal features of float can be seen in Exhibit 1.4.
Economic or Total Business Float
For purposes of effective cash management, however, the float concept should be
expanded. Exhibit 1.5 is a macro look at what might be called economic float or
I. DEFINITIONS:
Float = status of funds in transit
= items in process of collection (uncollected funds)
II. ELEMENTS OF FLOAT:
Disbursements Float Collection/Availability Float
1. Mail float USPS delivery time USPS delivery time
2. Processing float Vendor procedures In-house procedures
3. System float Check clearing time Check clearing time
III. COST OF COLLECTION/AVAILABILITY FLOAT:
Annual volume Transit time % cost of Cost of
of credit receipts in days/365 funds float
Example:
$100 million 1/365 4% $10,959/day
IV. ADVANTAGE OF DISBURSEMENTS FLOAT:
Annual volume # days % cost of Advantage of
of checks issued outstanding/365 funds float
Example:
$75 million 1/365 4% $8,219/day
Exhibit 1.4
Float Features