Question 19.1: 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 why financial managers have to be more concerned with available balances than book balances.