Cash Float
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
When one company pays another by check, there's a gap between when the check is sent and when the seller can actually use the money. That gap is cash float, and companies on either side of it want opposite things.
What is cash float?
Say a buying company cuts a check and mails it to a selling company. The check has to travel through the mail, then the seller has to open it, deposit it, and wait for it to clear before the funds actually show up in their bank account. That entire process — from the check being sent to the funds being usable — is the cash float.
Why do buyers and sellers want opposite things?
The buyer wants the float to be as slow as possible: the longer the check takes to arrive and clear, the longer the buyer keeps use of its own cash. The seller wants the float to be as fast as possible, since it wants access to the money it's owed as soon as it can get it.
How can a company reduce cash float?
Two common tools shrink the float on the seller's side:
- Electronic funds transfer (EFT): an instant transfer directly between banks. There's no check to cut, mail, or wait on — the funds move immediately, eliminating float almost entirely.
- Lockbox: a secure box maintained at the bank. Instead of mailing payment to the selling company's office, the buyer sends it straight to the lockbox, so the bank deposits the funds faster than if the check had to pass through the seller's own hands first.
Cash float is a tug-of-war over whose cash it is in the meantime. Every day a payment sits in transit is a day the buyer effectively holds onto funds it technically already owes — which is exactly why sellers push for EFT and lockboxes to collect faster.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.