about two days, but mail delays can slow down things on each end of the Fed’s in-
volvement in the process.
Using Float
Floatis defined as the difference between the balance shown in a firm’s (or individual’s)
checkbook and the balance on the bank’s records. Suppose a firm writes, on average,
checks in the amount of $5,000 each day, and it takes six days for these checks to clear
and be deducted from the firm’s bank account. This will cause the firm’s own check-
book to show a balance $30,000 smaller than the balance on the bank’s records; this
difference is called disbursement float.Now suppose the firm also receives checks in
the amount of $5,000 daily, but it loses four days while they are being deposited and
cleared. This will result in $20,000 of collections float.In total, the firm’s net float—
the difference between the $30,000 positive disbursement float and the $20,000 nega-
tive collections float—will be $10,000.
Delays that cause float arise because it takes time for checks (1) to travel through
the mail (mail float), (2) to be processed by the receiving firm (processing float), and
(3) to clear through the banking system (clearing, or availability, float). Basically, the
size of a firm’s net float is a function of its ability to speed up collections on checks it
receives and to slow down collections on checks it writes. Efficient firms go to great
lengths to speed up the processing of incoming checks, thus putting the funds to work
faster, and they try to stretch their own payments out as long as possible, sometimes by
disbursing checks from banks in remote locations.
Speeding up Receipts
Two major techniques are now used both to speed collections and to get funds where
they are needed: (1) lockbox plans and (2) payment by wire or automatic debit.
Lockboxes A lockbox planis one of the oldest cash management tools. In a lock-
box system, incoming checks are sent to post office boxes rather than to corporate
headquarters. For example, a firm headquartered in New York City might have its
West Coast customers send their payments to a box in San Francisco, its customers in
the Southwest send their checks to Dallas, and so on, rather than having all checks
sent to New York City. Several times a day a local bank will collect the contents of the
lockbox and deposit the checks into the company’s local account. In fact, some banks
even have their lockbox operation located in the same facility as the post office. The
bank then provides the firm with a daily record of the receipts collected, usually via an
electronic data transmission system in a format that permits on-line updating of the
firm’s accounts receivable records.
A lockbox system reduces the time required for a firm to receive incoming checks,
to deposit them, and to get them cleared through the banking system so the funds are
available for use. Lockbox services can accelerate the availability of funds by two to
five days over the “regular” system.
Payment by Wire or Automatic Debit Firms are increasingly demanding pay-
ments of larger bills by wire, or even by automatic electronic debits. Under an elec-
tronic debit system, funds are automatically deducted from one account and added to
another. This is, of course, the ultimate in a speeded-up collection process, and com-
puter technology is making such a process increasingly feasible and efficient.
What is float? How do firms use float to increase cash management efficiency?
What are some methods firms can use to accelerate receipts?
Cash Management Techniques 593
588 Working Capital Management
