Float is an important technique to reduce the length of the cash cycle. When a firm receives or makes payments in the form of Cheque etc., there is usually a time gap between the time the Cheque is written and when it is cleared. This time gap is known as float. The float for the paying firm refers to time that elapses between the point when it issues a Cheque and the time at which the funds underlying the Cheque are actually debited in the bank account. For the payee Firm, float refers to the time between the receipt of the Cheque and the availability of the funds in its account. So, float denotes the funds that have been dispatched by a payer (the firm making the payment) but are not in a form that payee (the firm receiving the payment) can spend. The float also exists when a payee has received funds in a spendable form but these funds have not been withdrawn from the account of the payer.
There are three types of float:
Mail Float: Time spend in the mail
Clearance Float: Time spend trying to clear the bank
Processing float: Time required to process cash flow transaction.
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