This component of float is attributable to the time

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Unformatted text preview: loat is the time between receipt of the payment and its deposit into the firm’s account. 3. Clearing float is the time between deposit of the payment and when spendable funds become available to the firm. This component of float is attributable to the time required for a check to clear the banking system. Some popular techniques for managing the component parts of float to speed up collections and slow down payments are described here. Speeding Up Collections Speeding up collections reduces customer collection float time and thus reduces the firm’s average collection period, which reduces the investment the firm must make in its cash conversion cycle. In our earlier examples, MAX Company had annual sales of $10 million and 8 days of total collection float (receipt, processing, and collection time). If MAX can reduce its float time to 5 days, it will reduce its investment in the cash conversion cycle by $83,333 ([$10,000,000/360 days] 3 days). A popular technique for speeding up collections is a lockbox system. A lockbox system works as follows: Instead...
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