April 28, 2022

How much cash do you really have on hand? Understanding cash and credit card floats

Float is a complex but important financial concept, one that your business needs to understand. Keeping an eye on float, and understanding how to handle it, can help businesses of any size avoid shortfalls in their budget. 

However, not all float terms in finance mean the same thing. In fact, some definitions are radically different.

In this article, we’re going to guide you through what float means, the difference between cash, credit, and stock float (among others), and how float affects your accounting and financial decisions. 

What is a float in finance?

The most common usage of the term “float” is money that exists on two different ledgers simultaneously. It’s a phantom calculation, a temporary state of doubled money created by situations like a delay in payment processing. 

In its simplest and most common form, this “float” still appears on the books of the paying party but has also entered the account of the payee. The money (or other resources being “floated’) doesn’t truly exist in both locations, but for a short period of time, it seems to. Not accounting for this float can create confusion and even obscure cash flow problems.

All financial institutions and departments have to deal with float, be it cash, credit card, or collection float. 

What is a stock float?

Stock float is a common financial term, but it isn’t really the same as cash or credit floats. When a company “floats” a stock, it means they’re going public. 

Stock float is the pool of shares a publicly-traded company has available for purchase. 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 far, this is called “low float,” and can make expansion difficult for the company in question. 

What is a cash float?

Cash float refers to the disparity between what a business should have and what the bank says a business has. Cash float exists because payments, checks, and money transfers aren’t instantaneous. An invoice marked as “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.

Businesses have their own internal accounting processes where they keep track of all incoming and outgoing cash—invoices paid or pending, payments made, etc. However, any accountant will tell you that 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 sending and receiving, the wider this cash float becomes. Cash float is normal and is a regular part of managing the cash flow of your business.

Other types of cash floats 

There are more granular terms for cash floats you should be aware of, as well as terms that are important for understanding how cash floats work:

Disbursement float

Disbursement float is a specific term for when the cash on the company’s financial statements is lower than the amount in the bank. 

This is usually caused by the business sending out payments (usually 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

Collection float is the opposite of disbursement float. When a company’s internal ledger shows a higher amount of money than the bank statement does, that’s a collection float. 

This occurs when the company receives a payment (a check or charge), but the balance in the bank account hasn’t gone up by the same amount. 

Net float

Net float is the total of all cash floats, combining the positive and negative values from collection, disbursement, and other types of floats. 

This net float calculation is used to keep a better handle on how close the incoming or outgoing cash flow is to what the bank says it is. 

This net float may be larger for companies that deal primarily in check payments, where processing times are longer. 

Cash float in retail

Cash float in retail is 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, representing a gray area for the business's cash assets. 

Cash float vs. petty cash

Petty cash may factor into your cash float, but it’s usually far more documented. The amount available in your petty cash fund for everyday purchases is usually a fixed amount, one that can be calculated with other finances more easily.

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 it isn’t organized (and the procedures aren’t followed for spending and recording). 

What is a credit card float?

Credit card float is the time after making purchases before the interest payment on that credit card kicks in. 

This gap is most often taken advantage of by making purchases on your credit card after you’ve made your payments, and making a payment before the interest is due next pay cycle. 

This effectively gives businesses a floating grace period of interest-free purchases. This grace period can vary between credit cards, so it’s important for businesses to do their research to learn and schedule their window for credit card float. 

Are there any benefits or downsides to cash floats and credit card floats?

Cash and credit card floats aren’t inherently bad, but they can complicate the financials of any business.

Cash and credit floats are simply two side effects of a complex system. As long as payments take time to process and credit cards have grace periods for interest calculation, cash and credit floats will be an issue to overcome. 

Cash floats aren’t necessarily beneficial, so consider digital payments to help you with payment processing 

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

Setting up digital bill payments, for instance, is probably the easiest way to reduce the time it takes to process a payment. The fewer physical checks you write and receive, the faster payments will go through, and the more in-sync your ledger will be with the actual money in your account.

Cash floats require constant GL monitoring

Obviously, cash and credit floats make accounting 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” that will be leaving your account any second and equally aware of lower balances that could increase the moment a few payments go through. 

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 for businesses making frequent and regular high-price purchases with their credit cards, avoiding interest can add up to huge savings. 

Credit card floats require you to pay your balance in full

The challenge of credit card float is that you have to be able 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’re paying the interest on what’s leftover. If a business is only partially paying off its credit cards, credit card float can’t help. 

How Ramp can help you control cash float

Ultimately, cash 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’re going to have with cash float inaccuracy.

Ramp allows you to control your financials, from cash flow to credit card spending, at a high level of detail with our accounting automation software. The ability to sync all of your financial accounts, services, and software gives you more accurate data—the platform also sends customized notifications, which can be used to keep an eye on a widening cash float gap.

More accurate, up-to-date data prevents cash float from getting out of hand. And that means less time calculating phantom cash and more time to spend on more lucrative and necessary accounting. 

Learn how Ramp strengthens your finances

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Former Senior Content Marketing Manager, Ramp

As a Content Marketing Manager, Luis tackles content planning and ideation while constantly brewing over SEO opportunities. Before Ramp, he worked on content for Audible and WeWork.

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Is cash float a bad thing?

As a business owner, cash float is a normal occurrence and happens when the amount of cash a business has does not match what’s on the books. Cash float occurs naturally since there can be delays from withdrawals and deposits.

What is the difference between cash float and petty cash?

Petty cash is the amount of money an entity, typically an individual or retailer, has on hand. Cash float, as described above, can take many forms, which can include petty cash. Both are part of the financial management of a business.

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