Page 257 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes The float can also work in reverse. Suppose U Co. Ltd. receives a cheque for 100,000 from a
customer. It deposits the cheque and both the company and the bank increases the ledger balance
by 100,000.

Company’s ledger balance + Payment float
900,000 200,000

equals

Bank’s ledger balance
1100,000

But this money isn't available immediately to the company. The bank doesn't have the money
till it has sent the cheque and received payment from the customer's bank. Since the bank has to
wait, it makes U Co. Ltd. wait too – usually 1 or 2 business days. In the meantime, bank will
show that U Co. Ltd. has an available balance of 10 lakhs and availability float of 100,000.

Company’s ledger balance + Payment float
900,000 200,000

equals

Bank’s ledger balance
1100,000

equals

Available balance + Availability float
1000,000 100,000

It may be noted that the company gains as a result of payment float and loses as a result of the
availability float. The difference is often termed the net float. In our example, the net float is
100,000. The company's available balance is therefore 100,000 greater than the balance shown
in its ledger.
The financial manager's concern is with the available balance and not with the company's ledger
balance. If it is known that it may take a week or two before some of the cheques are presented
for payment, one may be able to get by with a smaller cash balance. This game is often called
playing the float. One can increase the available cash balance by increasing the net float.

11.4.2 Managing Float

There are several kinds of delay and so people in the cash management refer to several kinds of
float.

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