If you’re serious about nailing down cash flow management, then one of the key finance concepts you’ll want to get a handle on is float.
Credit card float is a term used in business finance to represent the time period between payments being made and payments being cleared, where the funds are essentially accounted for twice.
If you’ve got a lot of credit card float, it can cause some real challenges for effective cash flow management.
In this article, we’re going to explain how to manage those challenges.
We’ll discuss what a credit card float is, what important implications it has for managing cash flow, and dive into some expert best practices for keeping on top of float.
What is float?
In business finance, float refers to the time period when payments have been made but not yet received into or credit out of an account.
In accounting terms, it's the difference between the money that exists simultaneously on two different ledgers — which makes it seem like you have double the money that you actually have — caused by delays in payment processing.
What is a credit card float?
Credit card float is a financial term used to describe the period of time between a credit card transaction being made and the funds actually leaving your account.
For example, say you make a purchase on your business credit card, but you’re not required to pay that credit card bill just yet.
You’ll record that expense in your accounting books, but the money hasn’t actually been credited from the other side of the ledger (e.g. your bank account), because you still haven’t paid that credit card bill.
During this time, it's as if those funds are in a temporary limbo. You still have the available for other purposes — like earning interest — until that credit card statement is due.
It's important to recognize float because it accounts for what might otherwise be discrepancies in your financial records — you might have journaled that credit card purchase as an expense, but your cash on hand doesn’t reflect that yet, since you haven’t paid the card statement.
There are also implications for inventory management (you can make a purchase from a supplier even if you don’t have the cash on hand since you know it's in float and will clear soon).
What is cash float
Cash float is the same as credit card float but in the context of your bank account.
It's the difference between the actual balance of your bank account and your company’s accounting balance.
Think about ACH payment timeframes, for instance. You might take an ACH payment from a client and mark that invoice as paid, but there is a 1-3 payment window where the cash hasn’t hit your account yet.
Similarly, you might make a purchase with one of your suppliers via cheque, marking that invoice as paid and noting it down as an expense in your expense management solution, but it could take a couple of days for the vendor to actually credit the funds from your account.
Cash float can be broken down further into three kinds of float:
- Disbursement float: When the cash on your financial statements is lower than what you have in the bank.
- Collection float: When the cash on your financial statements is higher than what you have in the bank.
- Net float: The total of all cash floats (the difference between disbursement float and collection float).
Other kinds of cash floats
Some financial terms are used in multiple contexts and can mean more than one thing, depending on what you wish to refer to.
Cash float is one of those terms.
Cash float as a synonym for petty cash
The term cash float is often used to describe cash that a small business keeps on hand for small purchases, also known as petty cash. For example, if the office runs out of milk, an employee can request access to the petty cash supply from the office manager and run down to buy some more.
Cash float in retail contexts
In retail contexts, the term float is used to refer to the amount of cash in the cash register at the start of the day.
For example, as a store clerk, you might start the day with $200 worth of small bills and coins so that you have some change to give out to any cash buyers. That would be your cash float.
For the rest of this article, when we talk about cash float, we’re referring to the aforementioned definition:
The time delay between movements of money from one bank account to another, such as when a wire transfer has been made but has not yet cleared to the recipient’s account.
How float impacts cash flow
Float is inevitable — payments don’t always clear immediately. Understanding and monitoring float is what’s important, as it can have an outsized impact on cash flow management.
How credit card float impacts cash flow
If you’ve made a lot of purchases on your business credit card this month, you might still have a very healthy-looking bank account since no cash has actually flowed out of your account just yet.
Without accounting for your credit card float (the bill you haven’t paid yet), you might lead yourself to believe you’ve got some extra cash on hand to invest in additional inventory at a discounted rate, for example.
This could get you in hot water when it comes time to pay your credit card statement, and there’s not even cash left on hand.
How cash float impacts cash flow
Cash float impacts cash flow and decision-making in two ways.
The first is when customer payments don’t clear right away.
For instance, if you’re accepting payments via credit cards, you’ll generally need to account for a 2-3 delay before receiving those funds, perhaps even longer if public holidays are involved.
This might mean that even though an invoice is due on the 20th of the month, you shouldn’t count on that cash being in your account until the 23rd, which has implications for how you manage your own supplier payment due dates.
The second is your own payments to suppliers.
If you know there will be a processing delay for your ACH payment, for example, you might want to send the payment a few days before the invoice due date to avoid any late payment fees.
This has important implications for how you schedule vendor payments, as well as how you manage your cash on hand and payments from customers to ensure you’ve got funds available to pay suppliers.
In short, there are really no tangible upsides to cash and credit card floats, but they are a real part of managing business finances.
Your next step, then, is to learn how to keep on top of float.
Best practices for managing credit card floats
Monitor total float
The first step is simple:
Keep an eye on how much of your cash or credit card limit is in float at any one time.
Some spend management solutions may be able to support this, while a simple solution is to review credit card statements and any invoices recently marked as paid before making any important cash flow decisions.
Keep an eye on payment processing times
Understanding how payment processing timeframes can impact float and cash flow is critical.
Knowing that wire transfers are typically faster than ACH payments, for example, you might decide to prioritize the prior to minimize cash float.
Or you may set a policy of making credit card payments to suppliers two days prior to the due date to ensure you don’t have to pay any late payment fees.
Use integrated payment systems
Integrated payment systems — when your POS system is directly connected to your payment processor, usually both from the same vendor — help payments clear even faster, reducing the amount of time that cash is in flow.
Automate reconciliation and set up alerts
Automating reconciliation between the customer invoices you have marked as paid and the cash received into your bank account can help reduce float time.
You can also set up custom alerts in your accounts payable automation solution so that if there is a discrepancy between an invoice and payment (such as the amounts not matching), you’ll get a notification to rectify the issue.
Maintain a healthy cash reserve
Keeping a little extra cash on hand is always a good idea, but it's especially important in the context of a cash float, which can catch you by surprise.
If you do happen to make a purchasing decision but forget to consider that a customer payment hasn’t cleared yet, you’ll be able to draw on your additional reserve.
Get on top of business credit
Cash and credit card float is an important concept in keeping on top of business financials and ensuring healthy cash flow management.
BILL, our financial operations platform, offers a number of helpful features for managing company financials, from:
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