What is Cash Float? The Essential 3 Types For Business Owners

So, here's a not-so-fun fact for you: around 82% of businesses fail because of cash flow problems. That's a huge number, right?

Managing your cash flow is absolutely critical, and one key part of that is understanding something called a "cash float." 

A cash float is basically the money you have on hand to make sure everything runs smoothly. Whether it's in your cash register or your bank account, knowing how to manage it can make or break your business. 

In this blog, we’ll talk about what a cash float is, the different types you should know about, and some tips on how to manage them. Let’s get started and make sure you’re not part of that 82%!

What is cash float?

Simply put, a cash float is the money a business has on hand to keep things running smoothly day-to-day. Think of it as the cash in your wallet that you use for small, everyday purchases. For a company, it’s the cash in the cash drawer register or the balance in the bank account that’s immediately available.

In simpler terms, cash floats ensure that you can make change for customers, pay for unexpected expenses, or handle other routine transactions without any hassle. It's a really important part of managing your cash flow, making sure you have enough funds available at any given moment to keep your business operations ticking along without interruption.

The meaning of cash float in cash drawers

In the context of cash drawers, a cash float is the small amount of money you start with in the cash register at the beginning of the day or shift. This initial amount ensures you can make change for customers right from the start. 

Imagine you open your store in the morning and a customer makes a small purchase with a large bill. Without a cash float, you wouldn’t be able to give them the correct change. So, having a set amount of money in the drawer helps keep transactions smooth and efficient throughout the day.

The meaning of cash float in a company’s bank account

When we talk about a cash float in a company’s bank account, we’re looking at the difference between the recorded balance and the actual available cash balances. This difference can occur due to delays in processing deposits or withdrawals. 

For example, if you deposit a cheque, it might take a few days to clear and be available in your account. During this time, the cheque amount is not part of your cash float. Managing this float is crucial for ensuring you have enough liquidity to cover daily expenses, make payments, and avoid overdrafts. It helps you keep track of what money is actually available to spend versus what’s still in transit.

3 types of cash float in business accounting

Let's break down the three main types of cash float. It's simpler than you might think!

Disbursement float

Disbursement float is when you write a cheque or make a payment, but the money hasn't left your account yet. Imagine you pay a supplier today, but the cheque won't clear for a few days. During that time, it feels like you still have that money in your account. It’s like a little buffer. Handy, right? Just remember, it’s temporary!

Collection float

Now, your collection float is the opposite. It’s when you get paid, but the money isn't in your account yet. Think of it like this: a customer gives you a cheque, but it takes a couple of days to clear. During those days, you can’t actually use that money yet. It’s in limbo. Knowing about collection float helps you avoid thinking you have more money available than you really do.

Net float 

Net float is just the difference between disbursement float and collection float. It’s like the balance of money on its way out versus money on its way in. Here’s a simple way to look at it:

Net Float = Disbursement Float - Collection Float.

If your net float is positive, you have more outgoing payments in limbo than incoming ones, giving you a bit of extra cash to play with temporarily. If it’s negative, more cash is on its way in than out. Keeping an eye on your net float helps you manage your cash flow better and avoid surprises.

NOTE: Cash floats are not to be confused with the types of float the Federal Reserve keeps an eye on. They track two main types: holdover float, when cheques get delayed over weekends or during busy seasons, and transportation float, caused by weather delays in cheque transportation. 

How to calculate a business cash float

Calculating your business cash float is pretty straightforward. Let’s break it down step by step.

1. Start with your opening balance: This is the amount of cash you start with at the beginning of the day or shift. For example, if you have $200 in your cash register at the start, that’s your opening balance.
2. Add Your cash inflows: This includes all the cash you receive during the day. Think of customer payments, cash sales, and any other cash received. Let’s say you make $1,000 in sales.
3. Subtract your cash outflows: These are all the payments and expenses you make during the day. This could be things like paying suppliers, bills, or any other expenses. Assume you pay $300 for supplies.
4. Consider any deposits and withdrawals: If you deposit some of your cash into the bank or withdraw additional cash, add or subtract these amounts. For instance, if you deposit $500 into your bank account, you need to account for that.
5. Calculate the Net Cash Float: Now, just add up everything. Here’s a simple formula: Net Cash Float = Opening Balance + Cash Inflows - Cash Outflows.

Business cash float example 

Let’s put this into a real-world scenario. Imagine you own a small café.

You start your shift with $200 in the cash register. As customers pay for their meals in cash, let’s say they bring in $1,500. Throughout the day, you spend $200 on fresh ingredients and another $100 on a utility bill. At the end of the day, you decide to deposit $700 of your earnings into your bank account to keep things organised.

After all that, your net cash float, which is what’s left after subtracting what you spent from what you earned, ends up being $700. This is the actual cash you have on hand to handle daily expenses and keep your café running smoothly.

How to optimise cash float management

Making sure your cash flow stays smooth can really boost how well your business runs. Here’s how you can do it:

Maximise the disbursement cycle 

Think of this as stretching out how long it takes for your money to go out. Negotiating longer payment terms with suppliers or timing your payments strategically can buy you extra time with your cash. It’s like giving yourself a little buffer to manage your expenses without running low on funds too quickly.

Minimise the collection float

This is about speeding up how quickly you get paid. Using electronic payments or making your invoicing process slicker can help cash come in faster. The quicker you get paid, the less time your money sits in limbo, and the more you have available for whatever comes up next.

By juggling these strategies, you can keep your cash flow steady and make sure your business stays strong financially. It’s all about having the right amount of cash on hand at the right time to keep things running smoothly.

Implementing advanced point of sale technology in your cash management

Bringing in a modern, point of sale (POS) system can really jazz up how you handle cash in your business. These systems do more than just ring up sales,they practically run your accounting for you. Here's some benefits:

Automated reporting

No more crunching numbers! Advanced retail and hospitality POS systems whip up detailed reports automatically. You’ll always know what’s hot-selling, how much stock you have left, and where your cash stands. It saves you time and gives you insights at a glance.

Streamlined transaction processing

With everything integrated, like payments, accounting apps, and inventory, checkouts zip through faster. It’s smoother for your customers, and you dodge the headaches of tracking everything manually. Plus, fewer errors mean happier customers and smoother operations for you.

Accurate cash reconciliation 

Counting cash at day’s end becomes extremely easy with POS software. These systems track every sale and payment, so you’re always on top of your cash flow. No more chasing loose ends—everything adds up neatly.

Cash flow forecasting 

By crunching sales data in real time, these systems predict your cash flow trends. It’s like having a crystal ball for your finances. You can plan for busy seasons, handle expenses smarter, and keep your business on track for growth.

Implementing advanced POS tech simplifies how you run your business and boosts your financial savvy. These systems are like having a trusty assistant who handles the nitty-gritty processes so you can focus on what really matters, growing your business and keeping your customers happy.

Cash float bottom line

Keeping a tight grip on your cash float is essential for running your business smoothly. It means you'll always have enough cash available to handle daily expenses, pay bills on time, and avoid unexpected money crunches. By managing your cash flow well, you not only keep things running without hiccups but also set yourself up to make smarter financial decisions and grow your business confidently.