What is credit card float?

Credit card float is the period between when you make a credit card purchase and when your bank account is actually debited for that transaction. During this time, the funds are in a temporary state of limbo.

The credit card company pays the merchant, and you have a grace period (usually 20-25 days) to repay the credit card company without incurring interest.

Keeping an eye on float—particularly credit card float—can help your business manage monthly expenses and avoid budget shortfalls. In this article, we'll delve more deeply into the concept of float, and explain how float can affect your business accounting and financial decisions.

How credit card float can affect your business

During the built-in grace period between when you make a credit card transaction and when you’re required to pay your credit card bill, funds are still available to you for other purposes, such as earning interest in a savings account.

A credit card balance is a current liability, and the cash used to pay the balance is a current asset. Credit card float delays using a current asset to pay a current liability. Paying your current debt obligations requires future income.

This can also be called “living on credit card debt”, meaning you’re charging everyday expenses to a credit card and counting on future income to pay them off. After a time, this creates a cycle that’s hard to get out of. Each month you’re using your income to pay off old expenses, so it’s very difficult to save any money and get ahead. If a business or individual cannot consistently generate future income, credit card use may create a financial hardship.

Relying on credit card float every month can be very risky. It’s important to remember that a float is a temporary benefit, and as a cardholder you’re ultimately responsible for paying off your credit card balance by the due date to avoid interest charges and fees.

An example of credit card float in action

Imagine you have a $50,000 bill due to a vendor on September 1st, but only $25,000 in your bank account. You know you'll receive $40,000 for this month’s income on September 15th, but that's too late to pay the vendor.

To avoid missing the payment deadline, you use your business credit card to pay the vendor. Your credit card bill won't be due until the end of September, giving you some extra time.

Now, you've paid the vendor, and you still have your original $25,000 in your bank account. When your $40,000 payment arrives on September 15th, you'll have a total of $65,000. This is enough to comfortably pay off the full amount charged to your credit card by the end of the month in full.

The problem with using credit card float this way

Credit card float can be helpful if used strategically, but it can also destabilize your business finances.

When you use a float, you are banking on receiving your next payment before the credit card due date. But as we know, nothing is 100% certain in business. Your next payment’s arrival could be delayed for a multitude of reasons.

If that payment doesn’t materialize, it can wreak havoc on your business finances. You may have to divert cash allocated for other operational expenses to pay off the credit card float. This can affect your payroll, utilities, and inventory, and lead to a cycle of debt.

Other types of float

Stock float and cash float are other terms commonly in finance and accounting, and there are even different types of cash float.

Stock float

Stock float, or floating stock, is the number of shares a company has available for public purchase. When a company "floats" a stock, it means they're going from private to public and will be offering shares of their company to the public via the stock exchange.

Assume that a company has issued 100,000 shares to the public. 10,000 shares are restricted stock (sale of the stock is restricted), and 5,000 shares are treasury stock (stock repurchased by the issuer).

The stock float (or outstanding shares) is 85,000 shares. The restricted stock and treasury stock shares are deducted from the issued shares.

Ideally, a publicly traded company should have a decent float size, enough to encourage investment. When the number of shares available for investment drops too low, this is called “low float” and can make expansion difficult for the company.‍

Cash float

Cash float is the difference between your business's accounting balance and the actual balance in your bank account. Cash float exists because payments, checks, and money transfers aren’t instantaneous. An invoice marked “paid” in accounting software may still be in processing between two banks. A check can be received and not cashed; it can also be cashed and not processed. These delays in processing time can lead to the appearance of duplicate money.

‍As a business, your accounting processes are set up to keep track of incoming and outgoing cash, like payments made and invoices paid or pending. But as any accountant will tell you, the cash balance displayed in your internal accounting ledger and the cash balance of the bank account seldom match.

The larger your business, the more payments you’re likely sending and receiving, resulting in a wider cash float. But remember, cash float is nothing to be concerned about; it's a regular part of managing the cash flow of your business.

Types of cash floats

"Float" can also refer to different things in finance. There are some of the types of floats and their definitions:

• Disbursement float: When the cash on your company’s financial statements is lower than the amount your company has in the bank. This is usually caused by your business sending out payments, like checks, that haven’t cleared the bank yet. If the payment is a check that’s being physically mailed to the recipient, the time in the mail system is also part of the float.
• Collection float: The opposite of disbursement float. When your company’s internal ledger shows a higher amount of money than the bank statement does, that’s a collection float. This occurs when your company receives a payment, in the form of a check or charge, but the balance in the bank account hasn’t gone up by the same amount.
• Net float: the total of all cash floats, combining the positive and negative values from the collection, disbursement, and other types of floats. The net float calculation is used to better understand how close your incoming or outgoing cash flow is to what the bank says it is. Net float may be larger for companies that deal primarily in check payments, where processing times are longer.
• Cash float in retail: The amount of money physically in registers, either for making change or from the day’s revenue. The cash in the register isn’t fully documented until the end of the day, leading to a temporary discrepancy in the business's cash balance. For retail businesses, it's generally recommended to keep a $500 to $1,000 float. This amount allows for flexibility in handling transactions and ensures enough cash to meet customer needs.

Cash float vs. petty cash

The cash you have on hand and that's readily available is called petty cash. This petty cash may factor into your cash float, but it’s usually well documented. Think of it as the cash you have in your register at any given moment; you know exactly how much there is. The amount available in your petty cash fund for everyday purchases is usually a fixed amount that can be calculated more easily with other finances.

Cash float, on the other hand, usually contains fluctuating amounts or uncertain time frames for processing. To break it down, petty cash only becomes part of a cash float if petty cash isn't reconciled and the procedures aren’t followed for spending and recording.

Pros and cons of credit card floats

Cash and credit card floats are a regular part of doing business, but they can become a problem when they start to skew the actual view of your business finances—or if they end up becoming overwhelming amounts.

Cash and credit floats are two side effects of a complex payments system. As long as payments take time to process and credit card accounts have grace periods for interest calculation, cash and credit floats will exist and have to be managed.‍ Let’s look harder at the upsides and downsides of riding the float.

Con: Floats require constant general ledger monitoring

Obviously, cash and credit floats can make accounting more difficult. When your bank and your ledger rarely agree, you can’t just take a quick glance at your cash flow or your assets.

You have to constantly be aware of what money is “phantom money.” With floats you have to track how much money will be leaving your account and be equally aware of lower balances that could increase the moment a few payments go through. Reconcile the cash account frequently to manage these issues.

Consider digital payments to help you with payment processing

There aren’t upsides to cash floats per se, but there are steps you can take to speed up payment times so that cash float is less of a concern.

Setting up digital bill payments with accounts payable software is the easiest way to reduce the time it takes to process payments. The fewer physical checks you write and receive, the faster payments will go through. That way, your ledger will more accurately represent the actual money in your account, giving you the most accurate view of your business financials at any time.

Pro: Credit card floats give you a window of interest-free purchases

One benefit of credit card floats is that you can buy things on credit without paying the subsequent interest.

It’s hardly “free money,” but avoiding interest can add up to huge savings for businesses making frequent and high-priced purchases with their credit cards. Just be sure to stay on top of your spending—if you start to carry a balance or miss a payment, it could hurt your business credit score.

Con: Credit card floats require you to pay your balance in full

The challenge of credit card float is that you need to completely pay off your credit card before the end of every grace period to reap the benefits.

If any balance at all is left on the card after the grace period, you’ll end up paying the interest on what’s left over. If your business only partially pays off its credit cards, credit card float can’t help.

Ramp helps control credit card float

Credit card float goes hand-in-hand with doing business. Payments take time, and banks can be slow. The better your cash flow organization, the fewer problems you’ll have with cash float inaccuracy.

The Ramp Business Credit Card allows you to control your finances and avoid overspending, from cash flow to credit card spending. Our tracking offers a high level of detail, thanks to our accounting automation software. The platform gives you the ability to sync all of your financial accounts, services, and software, giving you more accurate data. Plus, you can set up customized notifications, which can be used to track a widening cash float gap.

More accurate, up-to-date data prevents cash float from getting out of hand and leave you with enough money to operate your business. That means less time calculating phantom cash and more time to spend on accounting tasks that help you make more informed business decisions.