Question 20.1: Suppose you have $5,000 on deposit. One day, you write a che...
Suppose you have $5,000 on deposit. One day, you write a check for $1,000 to pay for books, and you deposit $2,000. What are your disbursement, collection, and net floats?
After you write the $1,000 check, you show a balance of $4,000 on your books, but the bank shows $5,000 while the check is clearing. The difference is a disbursement float of $1,000.
After you deposit the $2,000 check, you show a balance of $6,000. Your available balance doesn’t rise until the check clears. This results in a collection float of – $2,000. Your net float is the sum of the collection and disbursement floats, or – $1,000.
Overall, you show $6,000 on your books. The bank shows a $7,000 balance, but only $5,000 is available because your deposit has not been cleared. The discrepancy between your available balance and your book balance is the net float (– $1,000), and it is bad for you. If you write another check for $5,500, there may not be sufficient available funds to cover it, and it might bounce. This is the reason that financial managers have to be more concerned with available balances than book balances.