Float is the difference between the amount of checks written and deposited according to your own books or records, and the amount of those checks or deposits that have cleared your bank account. The following example should help you understand float.
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Hank's checkbook balance is $5,000 according to the check register he uses to record his checks and deposits. On the very same day, Hank's bank has a balance in his checking account of $9,000. This means that Hank has $4,000 in checks that he has written but that have not yet been cleared by his bank, or $4,000 of float.
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Float is the product of the check-clearing procedures of your bank and the Federal Reserve. Its significance in an age of automated fund transfers, debit cards, electronic fund transfer has been significantly reduced. When it used to take up to a week or more for a check to clear due to manual processing, it was a more important factor. Today, the only way to ensure that there is float is by mailing checks instead of using an electronic payment method, thereby guaranteeing that it will be at least a day or to before the check is received.
Many businesses neglect to consider the shortened float when they find themselves temporarily short of cash. There is one important rule to follow when using float — you must have the necessary cash inflows to cover the checks written before they clear your checking account.
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Remember Hank, the guy from the example above? Hank's check register shows he has a balance of $5,000 in his checking account while his bank shows he actually has a balance of $9,000. The $4,000 difference is Hank's float. To take full advantage of his float, Hank could write out an additional $4,000 in checks if he can reasonably expect to deposit a $4,000 cash inflow before the additional checks clear his bank account.
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Keep in mind that float is a two-way street, so to speak. If you write checks that clear your bank faster than your deposits clear, you'll create a negative float. The key to making what's left of float work in your favor is to accelerate your cash inflows and delay your cash outflows.