Definition
In finance, “Float” refers to the amount of money within the banking system that is briefly counted twice due to delays in processing checks. It can also refer to the number of shares that a company has available to the public for trading. Moreover, in terms of credit, it refers to the time difference between the purchase of a service or good and the payment for it.
Phonetic
The phonetic spelling of the keyword “Float” is: /floʊt/
Key Takeaways
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- Float is a CSS positioning property. Its primary purpose is to allow elements (like images, divs, etc.) to float to left or right along with content.
- In using CSS Float, the elements may become a block level element which means they could accept margins and padding.
- When the float property is used in CSS layout design, it often requires to apply the Clear property which is used to clear elements floated to one or both sides.
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Importance
The business or finance term “float” is important as it pertains to the time difference or delay between when a business writes or initiates a check or payment and when it’s actually processed or cleared. This time difference allows a business the opportunity to earn interest on those funds, although this advantage has diminished with the rise of electronic transactions. As a key aspect of cash management, understanding and managing a company’s float effectively can enhance its short-term cash forecasting accuracy, liquidity management, and overall operational efficiency. In the banking sector, the term float also signifies the total value of outstanding checks that have yet to be reconciled and cleared by the bank.
Explanation
Float is a critical term in financial management that represents the length of time between the point where a company issues an invoice or writes a check and the time the funds are removed from the account. It provides a crucial cash cushion for businesses, which they can use to generate interest or invest to make more returns. Its ultimate purpose is to optimize the use of available resources, enhancing a company’s liquidity. It gives businesses an extra time lapse to use the money that technically has been spent but is still present in their account, due to the waiting period for processing transactions.Furthermore, the concept of float becomes an important consideration in cash management strategies within corporate finance. It allows companies to match their cash outflows with the cash inflows effectively. This means businesses can generate additional income without disrupting their normal operations and also continue to meet their financial obligations. For instance, financial managers may decide to invest the ‘floating’ funds in short-term investments that can be easily converted to cash without loss of value. Understanding and managing float effectively here is therefore essential to ensuring smooth operational and financial efficiency.
Examples
1. Check Clearing: When a person writes a check, the amount isn’t immediately withdrawn from the account. This gap between the moment a check is written and when the money is actually withdrawn from the account is referred to as a “float”. 2. Credit Card Transactions: When a customer makes a purchase with their credit card, there is a time delay before the funds are actually transferred from the customer’s bank to the merchant’s bank. This sizable float of billions of dollars is leveraged by credit card companies to earn interest on funds while they are in the company’s holding.3. Insurance Premium Float: Insurance companies collect premiums from policyholders long before claims are paid out. This accumulated sum of money is known as the ‘insurance float’. Such companies can invest this float for profit. The longer the time between an insurance premium payment and a claim, the longer the insurance company can invest the money and make a larger return. Warren Buffett’s Berkshire Hathaway is well-known for successfully executing this strategy.
Frequently Asked Questions(FAQ)
What is a float in finance and business terms?
Float refers to the number of shares a company has issued and are available for trading by the public. It does not include shares held by insiders, employees, or major long-term shareholders.
How is the float calculated?
The float is calculated by subtracting the tightly held shares (those owned by insiders, employees, the company’s Employee Stock Ownership Plan or held as treasury shares) from the company’s total shares outstanding.
Does a low float indicate anything specific about a company?
A low float doesn’t necessarily indicate anything negative about a company. It may simply mean that a large portion of the shares are held by insiders. However, these stocks may be more volatile due to less liquidity.
Why is a float significant in the stock market?
Understanding a company’s float can be helpful for investors because it provides insight into the company’s stock volatility and liquidity. Stocks with small floats tend to be more volatile than those with large floats.
Is a higher float better for investors?
A larger float isn’t necessarily better or worse – it’s a matter of investment strategy. A larger float suggests the stock may be less volatile since it’s harder for a single trade to move the price.
What is the difference between ‘public float’ and ‘outstanding shares’?
‘Outstanding shares’ refer to the total number of shares issued by the company, including those owned by insiders and institutions. ‘Public float’ refers only to the shares that are available for trading by the public.
Can the float of a company change over time?
Yes, the float of a company can change. It increases if the company issues additional shares and decreases if the company buys back shares. It also changes if an insider chooses to sell shares to the public, thereby increasing the float.
Related Finance Terms
- Overdraft: This refers to a deficit in a bank account caused by drawing more money than the account holds.
- Cash Management: This involves managing cash flows within a business or organization. It’s related to float because it involves managing funds that are in the process of clearing or settlement.
- Check Clearing: This is the process of transferring money from the check writer’s account to the recipient’s, which can involve float time between when the check is written and when the funds are available.
- Reconciliation: This is the process of ensuring financial records match. During reconciliation, businesses account for the float, verifying that transactions in the settlement period match the bank account.
- Funds Availability: This refers to the period it takes for a deposit to become available for withdrawal, during which the money is considered to be in ‘float’.
