Collection float and net float are two related concepts that are used to measure the timing and availability of funds within a company’s cash management system.
Collection float refers to the time delay between when a company receives a payment and when the funds are actually credited to its bank account. For example, if a company receives a check from a customer, there may be a delay between the time when the check is received and when the funds are actually credited to the company’s account. During this time, the funds are said to be in collection float.
Net float, on the other hand, is the difference between the total amount of funds that a company is owed (in the form of outstanding checks or other payments) and the total amount of funds that it owes (in the form of outstanding bills or other payments). Net float takes into account both collection float and disbursement float (the time delay between when a company initiates a payment and when the payment is actually debited from its account).
Net float can be either positive or negative, depending on the timing of incoming and outgoing funds. A positive net float occurs when a company is owed more money than it owes, while a negative net float occurs when a company owes more money than it is owed.
Managing net float is important for companies, as it can affect their cash flow and overall financial stability. By monitoring and managing net float, companies can ensure that they have accurate and up-to-date information on their available cash balances, and can avoid the risk of overdrafts or other cash flow issues. Strategies for managing net float may include implementing electronic payment systems, optimizing payment schedules, and monitoring cash flow on a regular basis.