What Is Float?
In financial terms, the float is money within the banking system that is briefly counted twice due to time gaps in the registering of 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 some time to receive a check from the payer’s bank and record it. Until the check clears the account it's drawn on, the amount it's written for "exists" in two different places, appearing in the accounts of both the recipient’s and payer’s banks.
- The float is essentially double-counted money: a paid sum which, due to delays in processing, appears simultaneously in the accounts of the payer and the payee.
- Individuals and companies alike can use float to their advantage, gaining time or earning interest before payment clears their bank.
- Playing with float can spill into the realm of wire fraud or mail fraud if it involves the use of others' funds.
The Basics of Float
The Federal Reserve defines two types of float. Holdover float results from delays at the processing institution, typically due to the weekend and seasonal backlogs. Transportation float occurs due to inclement weather and air traffic delays and is, therefore, highest in the winter months.
The Fed—which processes one-third of all checks in the U.S.—has observed that although the amount of float fluctuates randomly, there are definite weekly and seasonal trends. For example, float usually increases on a Tuesday due to a backlog of checks over the weekend, as well as during the months of December and January because of higher check volume during the holiday season.
The Federal Reserve uses these trends to forecast float levels, which are then used in the actual day-to-day implementation of monetary policy.
How To Calculate Float
The formula to calculate float is:
Float = Firm's Available Balance - Firm's Book Balance
The float represents the net effect of checks in the process of clearing. A common measure of a float is the Average Daily Float, calculated by dividing the total value of checks that are in the process of the collection during a specified period by the number of days in the period. The total value of checks in the process of collection is calculated by multiplying the amount of float by the number of days it is outstanding.
For example, a company with $15,000 of float outstanding for the first 14 days of the month, and $19,000 for the last 17 days of the month will calculate its average daily float as:
- [($15,000 x 14) + ($19,000 x 17)] ÷ 31
- = ($210,000 + $323,000) ÷ 31
- = $533,000 ÷ 31
- = $17,193.55
The Uses of Float
Individuals often use float to their advantage. For example, Amanda has a credit card payment for $500 due April 1. On March 23, she writes and mails a check-in that amount, even though she doesn't have $500 in her bank account. She knows, however, that her paycheck will be deposited in her checking account by March 25—and she counts on the fact that the credit card company probably won't receive and present her check for payment until April 1. She has $500 worth of float—the time between the writing of her check and the time her check clears—for those days.
If she were tech-savvy, she could essentially do the same thing by going online on March 23 and scheduling an electronic payment on the credit card company's website for April 1, again counting for her bank to have posted her paycheck by March 25.
The Future of Float
Technological advances over the years have spurred the adoption of measures that substantially speed up payment and hence reduce float. These measures include the widespread use of electronic payments and electronic funds transfers, the direct deposit of employee paychecks by companies, and the scanning and electronic presentation of checks—instead of their physical transfer.
As a result, float in the U.S. declined from a record daily average of $6.6 billion in the late 1970s—when it spiked due to high inflation and high-interest rates—to only $774 million in 2000.
The steady decline in the number of checks written each year, combined with the rapid adoption of innovative and convenient payment services, may make float a thing of the past.
Real-World Example of Float
Large companies and financial institutions also often "play the float" with larger sums for-profit—namely, the interest income they earn on an amount by speeding up its deposit into their accounts or slowing down a presentation for payment.
Such moves are not illegal, either for individuals or for institutions, if the money involved is all their own. However, playing with float can spill into the realm of wire fraud or mail fraud if it involves the use of others' funds. Back in 1985, the brokerage firm E.F. Hutton & Company (now defunct) pleaded guilty to 2,000 such charges for deliberately and systematically overdrawing some accounts to fund other accounts, writing checks on money it did not have to profit from the float—in effect, getting millions in loans from the banks without the banks' knowledge and without paying fees or interest. It was, in essence, a floating scheme, executed on a grandiose 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.