What is the float?
Financially, the float is money in the banking system that is briefly counted twice due to delays in recording a deposit or withdrawal, usually due to the delay in processing paper checks. A bank credits a customer’s account as soon as a check is deposited. However, it takes a while to receive and save a check from the payer’s bank. Until the check clears the account from which it is drawn, the amount for which it is written “exists” in two different places, appearing in the accounts of the recipient and payer banks.
Key points to remember
- The float is essentially cash counted twice: an amount paid which, due to processing delays, appears simultaneously in the accounts of the payer and the recipient.
- Individuals and businesses can use the float to their advantage, save time or earn interest before the payment clears their bank.
- Playing with the float can spread in the area of wire fraud or postal fraud if it involves the use of other people’s funds.
The basics of the float
The Federal Reserve defines two types of floats. Holding float results from delays in the processing establishment, usually due to weekend delays and seasonal arrears. Transportation fluctuation occurs due to inclement weather and air traffic delays and is therefore highest during the winter months.
The Fed – which processes a third of all checks in the United States – has observed that although the amount of the float fluctuates randomly, there are definite weekly and seasonal trends. For example, the float generally increases on a Tuesday due to a backlog of checks during the weekend, as well as in the months of December and January due to the higher volume of checks during the holiday season.
The Federal Reserve uses these trends to forecast float levels, which are then used in the actual daily implementation of monetary policy.
How to calculate the float
The formula for calculating the float is:
Float = Available balance of the company – Accounting balance of the company
The free float represents the net effect of checks being cleared. A common measure of a float is the average daily float, calculated by dividing the total value of checks being collected during a specified period by the number of days in the period. The total value of the checks being collected is calculated by multiplying the amount of the free float by the number of days during which it is in circulation.
For example, a business with $ 15,000 in free float in the first 14 days of the month and $ 19,000 in the last 17 days of the month will calculate its average daily free float as follows:
- [($15,000 x 14) + ($19,000 x 17)] ÷ 31
- = ($ 210,000 + $ 323,000) ÷ 31
- = $ 533,000 ÷ 31
- = $ 17,193.55
Uses of the float
Individuals often use the float to their advantage. For example, Amanda has a $ 500 credit card payment due on April 1. On March 23, she writes and sends a check for this amount, even if she doesn’t have $ 500 in her bank account. She knows, however, that her paycheck will be deposited into her checking account by March 25 – and she expects that the credit card company will probably not receive and present her check for payment until April 1. . She has $ 500 to float – the time between writing her check and the time her check is cleared – for those days.
If she was tech savvy, she could essentially do the same by going online March 23 and scheduling an electronic payment on the credit card company’s website for April 1, counting again to have her bank released his pay check before March 25.
The future of the float
Technological advances over the years have prompted the adoption of measures which considerably speed up payments and therefore reduce the free float. These measures include the widespread use of electronic payments and electronic funds transfers, the direct deposit of employees’ pay checks by companies, as well as the scanning and electronic presentation of checks – instead of their physical transfer.
As a result, the U.S. float has declined from a record daily average of $ 6.6 billion in the late 1970s – while it has soared due to high inflation and lower rates. interest – only $ 774 million in 2000.
The steady decline in the number of checks issued each year, combined with the rapid adoption of innovative and practical payment services, could be a thing of the past.
Real example of float
Large companies and financial institutions are also “playing the game” with larger for-profit amounts, namely the interest income they earn on an amount by accelerating its deposit in their accounts or by slowing down a presentation for payment. .
Such movements are not illegal, neither for individuals nor for institutions, if the money in question is theirs. However, playing with the float can spill over into wire fraud or postal fraud if it involves the use of other people’s funds. In 1985, the brokerage firm EF Hutton & Company (now defunct) pleaded guilty to 2,000 of these charges for having deliberately and systematically withdrawn certain accounts to finance other accounts, by writing checks on cash which she did not need to take advantage of the free float – in fact, obtaining millions of loans from banks without the banks’ knowledge and without paying any fees or interest. It was, in essence, a floating plan, executed on a grand scale for years.
Since the float is essentially double-counted money, it can distort the measurement of a nation’s money supply by briefly inflating the amount of money in the banking system.