Corporate Finance

Cash Management 
 309

that the customers have not yet presented the checks issued by the company. As soon as the checks are
deposited in the bank, the company debits the cash account. But the bank credits the account only when the
amount is realized from the bank of the customer. This time lag is called deposit float. The deposit float is the
time-lag between drawing of a check by the customer, and the receipt of funds by the company. The deposit
float consists of mail float; processing float and check clearance float—it is important to monitor these three
components of the deposit float for accelerating receipts. Similarly, checks issued by the company but not
yet presented by the suppliers results in disbursement float (see Exhibit 16.5). The company credits the cash
account (bank account) as soon as checks are drawn and sent to suppliers, but the bank debits the company’s
account only when the banks of the suppliers present the check. For instance, the balance in the bank ac-
count may be Rs 10 lac, but the balance in the company’s books may only be Rs 5 lac, because it has issued
checks worth Rs 5 lac in payments. The disbursement float is available to the company until these cheques
are presented for payment. Disbursement float is affected by mail delivery time, check processing time and
collection of fund. Since the objective of cash management is to accelerate inflows and decelerate outflows,
the company can ‘ride the float’ by increasing the disbursement float and decreasing the deposit float.
Disbursement float can be increased by issuing the payable checks against a distant bank or mailing from a
remotely located post office! Playing the float requires the cash manager to think in terms of the bank
balance in the bank book, and not that in the company’s book of accounts. A cash manager should be careful
not to overdo it, and incur penalty from the bank if the manager draws on uncollected funds. Add to that the
cost of losing credibility in the eyes of the supplier. Although playing the float sounds smooth sailing,
it could be as risky as tight-rope walking. Moreover, one party’s disbursement float is another party’s deposit
float. Each manager works at reducing the floats that work against his/her company and extending those that
work for the company. So the effort of the manager may go in vain—in the sense that the benefits gained
somewhere may be offset by costs incurred elsewhere. Nevertheless, it pays to monitor the cash flow timeline.

Exhibit 16.5 Deposit and disbursement float

DEPOSIT FLOAT

Mail float Processing float Check clearance float

Check is

drawn by customer

and mailed out

Company

office

receives check

Check processed

and deposited in

local bank

Check

processed through

clearing system

Depositor

receives

funds

DISBURSEMENT FLOAT

Company

prepares check

to supplier

Post office

processing

Delivery of

check to supplier

Deposit to

bank

Bank collection

of funds based

on location