Float (Banking) - Explained
What is Float in banking?
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What is Float?
Float, in the banking system, refers to money briefly counted two times because of the delays in check processing. Float is built as soon as the check is deposited. The customers account is credited by the bank. However, the payers bank takes some time to send payment on the check. Until the payers bank clears the check, the check amount is displayed both in the payers and recipients bank.
How Does Float Work?
Because available funds are counted twice, the amount of float in the system effects the money supply by causing inflation and hindering effective monetary policy implementation. There are certain time periods where float fluctuates. For instance, Float is higher on Tuesday because of checks backlog on weekend. The Federal Reserve, based on these trends, forecasts float levels, and to makes monetary policy. Two types of Federal float have been defined by the Federal Reserve: holdover float that occurs due to institutions delays for processing; transportation float that happens due to weather and air traffic issues. The formula to calculate Float is Float = Firm's Available Balance - Firm's Book Balance You can also measure float as: Average Daily Float = total check values in collection phase during a specific period / the number of days falling under that period. Conversely, total check values to be collected is calculated by multiplying a float amount by the number of days outstanding. For example, if your business has a $15,000 float outstanding for first 14 days of the month, and $19,000 for the last 17 days of the month, then you can calculate the average daily float as: = [($15,000 x 14) + ($19,000 x 17)] / 31 = ($210,000 + $323,000) / 31 = $533,000 / 31 = $17,193.55