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For many small business owners, having sufficient cash flow is essential to make sure you can pay employees, suppliers, or other business partners in a timely fashion. However, the amount of money you have in your accounts at any given moment isn’t always an accurate representation of how much your business holds—this is because of cash float.
In this article, we’ll cover all the information you need to understand what cash float is and how it works within your business, as well as a few variations of this practice that could come in handy.
What is cash float?
Cash float is difference between the cash balances reported in your business accounting and the amount of cash you actually hold in your bank accounts. This discrepancy is usually the result of delays in payments or money transfers, as well as processing checks, which may take a bank several days to receive and record.
In retail businesses and restaurant settings, however, cash float can also refer to the amount of cash put in the register at the start of the day or an individual employee’s shift. This is usually a relatively small amount of cash, broken up into different bills and change so that customers can receive change. While this money is put forward by the business, it is not spent—the cash drawer is meant to reflect both the total sales of the shift plus the full cash float.
While the exact circumstances of the cash float are different, the situation is the same—the amount of money listed in the business bank account does not match the amount documented in your accounting. This is because money is currently in motion because it’s currently being used by a cashier to make change, it has not yet been officially received, or you’re waiting for it to be deposited by the bank.
Where is cash float most prevalent, and what factors influence it?
Although cash float exists in both of these circumstances, it’s less of an issue in retail and restaurant settings. The cash should come back within the same day and usually won’t become a significant discrepancy in your financial documents. When you’re working in a business setting where the float is caused by a lag in sending or receiving money, things can get a little trickier.
According to the Federal Reserve, which is responsible for depositing a third of all the checks received in the United States, cash float can be broken down into two sub-categories: holdover float and transportation float. Holdover float is caused by delays in the institution processing the check—for example, banks close on the weekend and during holidays and generally have a larger number of checks to process once they return to business. Transportation float is caused by delays in getting checks from one person or institution to another—this typically spikes during winter months, when weather is most likely to delay the post.
There are other trends that have been documented in cash float, as noted by the Federal Reserve, that you should make note of as a business owner. Float is often more common on Tuesdays, thanks to backlogs that can build up over the course of the weekend. You’re also more likely to experience cash float in December and January, since more checks are written during the holidays and banks are closed more than usual.
How to account for cash float in your bookkeeping
Knowing that cash float will exist in your business means you have the opportunity to identify systems internally to prevent confusion and error.
Without a doubt, the best thing you can do to mitigate cash float is to establish a very clear system of documenting cash flow within your business. That means working carefully to track when checks and payments are sent, received, and deposited and making note of each step. Keeping a careful paper trail will prevent overdrafts on any accounts which might be debited soon or from other accounting discrepancies.
The easiest way to ensure you’re accounting for cash float is by factoring it in when reconciling your books. Use this formula to calculate your current cash float:
Float = business’s available account balance – business’s book balance
Keeping a close eye on your cash float will help you take control of your payables and receivables. It can help you identify which checks you’re still waiting to clear and resolve any accounting discrepancies that may come up in your bookkeeping.
The bottom line
Accounting discrepancies are every business owner’s nightmare. But, cash float is a normal part of any healthy business’s financial lifecycle. Just be sure to account for it in your bookkeeping practices, and you’ll be well on your way to managing your business’s finances like a pro.