Presentation float refers to the time period between when a check is written and when it is presented to the bank for payment. This term is often used in cash management. During the float period, the funds remain in the payer’s account and continue to earn interest, but are also recorded as a payment made from an accounting perspective.
This time lag can be due to a variety of factors, including the mail delivery time (if the check is mailed), the payee’s delay in depositing the check, and the banking system’s processing time. Understanding the concept of presentation float is essential for effective cash management, as it may impact a company’s cash flow forecasting and fund management.
It’s worth noting that electronic transactions, wire transfers, and automated clearing house (ACH) payments have greatly reduced the duration and impact of float periods in many areas of the world. The use of physical checks has declined, and electronic forms of payment have become more common, leading to faster transaction times.
Example of Presentation Float
Imagine that on July 1, Company A writes a check for $10,000 to pay a supplier, Company B, and mails it the same day. Company B receives the check on July 3, but doesn’t deposit it until July 5. The bank then takes another two days to process the check, so the funds are not withdrawn from Company A’s account until July 7.
In this scenario, the presentation float is from July 1 (when the check was written) to July 7 (when the funds were actually withdrawn). So, the presentation float is six days.
During these six days, even though the check is recorded as an expense in Company A’s accounting system as of July 1, the funds are still in the company’s bank account earning interest until July 7. Understanding this float time can help Company A better manage its cash flow and optimize its cash management strategies.
It’s important to note, however, that this is a simplified example. In practice, especially with electronic transactions becoming more prevalent, float times can vary and may be much shorter.