Definition
In accounting and finance, the term “float” can refer to several different concepts:
- Stock Float: The proportion of a corporation’s stocks that are held by the public rather than the corporation or institutional investors. This is critical for assessing the liquidity and volatility of a public company’s stocks.
- Cheque Float: Money created as a result of a delay in processing cheques. For instance, when one account is credited before the paying bank’s account has been debited, a temporary duplication of money occurs.
- Petty Cash Float: Money set aside as a contingency fund or as an advance to be reimbursed.
- Cash Float: The amount of cash a business keeps on-hand for daily transactions.
- Flotation: The process of a company “floating” its shares on the stock market for the first time, also known as an Initial Public Offering (IPO).
Detailed Examples
Example 1: Stock Float
A company issues 1,000,000 shares, of which 400,000 are held by insiders and institutional investors. The remaining 600,000 shares are the float available to public investors.
Example 2: Cheque Float
Suppose Alice writes a cheque to Bob. The moment Bob deposits the cheque in his bank account, his account is credited, but Alice’s account might not get debited until a few days later. The resulting float is the temporary period where the money appears in both accounts.
Example 3: Petty Cash Float
A small business maintains a petty cash float of $500 to cover incidental expenses. At the end of the month, the business reconciles the expenses and reimburses the amount spent to bring the float back to $500.
Example 4: Cash Float
A retail store might keep a cash float of $200 in its tills at the start of each trading day to provide change for customers’ cash transactions.
Example 5: Flotation (IPO)
A successful startup decides to go public. During its IPO, it offers 5 million shares to the public, making them available for trading on a stock exchange. This process introduces the company’s shares to public investors for the first time.
Frequently Asked Questions (FAQs)
Q1: What determines the stock float of a company?
A1: The stock float is determined by the total number of outstanding shares minus the shares held by insiders, employees, and institutional investors.
Q2: How does cheque float impact the banking system?
A2: Cheque float can create a temporary surplus of money, affecting the availability of funds and potentially creating liquidity issues for banks if not managed properly.
Q3: Why do businesses maintain a petty cash float?
A3: Businesses maintain a petty cash float to cover small, incidental expenses that are not suitable for processing through accounts payable.
Q4: Can the float in cheque processing be eliminated?
A4: Many modern banking techniques, including electronic funds transfers (EFT), aim to reduce or eliminate the float by speeding up the payment process.
Q5: What are the risks associated with stock float for investors?
A5: Low float stocks can be highly volatile, as large buy or sell orders can dramatically affect the stock’s price. Additionally, limited availability can impact liquidity.
Related Terms with Definitions
- Initial Public Offering (IPO): The first time a company offers its shares to the public.
- Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
- Outstanding Shares: The total shares of a corporation that have been issued and are held by shareholders.
- Electronic Funds Transfer (EFT): The electronic transfer of money from one bank account to another without any paper money changing hands.
- Petty Cash: Small amount of money kept on hand for minor expenses.
Online References
Suggested Books for Further Studies
- “Accounting All-in-One For Dummies” by Kenneth Boyd
- “The Basics of Public Company Finance” by Gary L. Gastineau
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- “Financial Accounting: An Introduction to Concepts, Methods, and Uses” by Roman L. Weil
Accounting Basics: “Float” Fundamentals Quiz
Thank you for advancing your understanding of the various types of float in accounting and finance. Keep progressing in your journey of financial literacy and practical expertise!
