Average Daily Float

Average Daily Float

Average daily float refers to the dollar amount of checks or other negotiable instruments that are in the process of collection by a bank, financial institution, or other entity over a certain period, divided by the number of days in the period. For example, if Company XYZ has $300 of float outstanding for the first 10 days of the month, $450 of float outstanding for the second 10 days of the month, and $230 days of float outstanding for the third 10 days of the month, the average daily float calculation would look like this: Average Daily Float = ((300x10) + (450x10) + (230x10))/30 = $326.66 Average daily float is calculated by averaging the dollar value of float outstanding by the number of days of the month or other given period that amount was outstanding, then dividing it by the number of days in the period. Average daily float in the banking system as a whole increased during the 1970s due to an increase in the use of checks, high inflation, high-interest rates, and the common practice of drawing funds from faraway banks in order to take advantage of remote disbursement, or transportation float. The Monetary Control Act of 1980 resolved many of the issues that had contributed to high average daily float in the 1970s, while the increasing use of electronic funds transfers in the 1990s reduced average daily float to $774 million by 2000.

Float is money that appears in two bank accounts at once, due to a delay in processing.

What Is Average Daily Float?

Average daily float refers to the dollar amount of checks or other negotiable instruments that are in the process of collection by a bank, financial institution, or other entity over a certain period, divided by the number of days in the period. When applied to the stock market, it can also refer to the number of company shares that are actually outstanding and available for trading on the public market on an average daily basis.

Float, as defined by the Federal Reserve, is money that appears in two bank accounts at once, due to a delay in the processing of checks or the transfer of cash.

Float is money that appears in two bank accounts at once, due to a delay in processing.
Average daily float is the dollar amount of checks or other negotiable instruments that are in the process of collection by an entity over a certain period, divided by the number of days in the period.
In the stock market, the average daily float is the number of company shares that are outstanding and available for trading on an average daily basis.
Companies and individuals may use float to earn interest on funds before a check is cleared at their financial institution.
Float in the banking system as a whole can affect the system’s money supply.
Any factor that slows the process of clearing checks with the Federal Reserve can cause float in the banking system.

Understanding Average Daily Float

As a trading term, the average daily float is a measure of the liquid market for a company's stock. If a company is closely held and only a small portion of the stock is trading in the public markets, it will affect the bid/ask spread and a number of other aspects of how the stock is valued.

The banking term for float is most commonly applied to banks, although it can also refer to large corporations that have both checks deposited and paid checks outstanding. Some industries rely on float to make a profit. The insurance industry, for example, uses float in this manner. Float in the insurance industry comes about because an insurance company collects premiums before paying losses, and it can hold that money for years before having to pay out on a claim.

The insurance company can, therefore, invest its float in such a way as to earn more money for the company. Warren Buffett has famously achieved this by investing Berkshire Hathaway’s float in low-rate government bonds. Bonds are a safe investment, so Buffett doesn’t risk losing the float money by investing it as such, but over time the investment has earned the business extra money.

Calculating Average Daily Float

Average daily float is calculated by averaging the dollar value of float outstanding by the number of days of the month or other given period that amount was outstanding, then dividing it by the number of days in the period. For example, if Company XYZ has $300 of float outstanding for the first 10 days of the month, $450 of float outstanding for the second 10 days of the month, and $230 days of float outstanding for the third 10 days of the month, the average daily float calculation would look like this:

Average Daily Float = ((300x10) + (450x10) + (230x10))/30 = $326.66

This means that on average over the course of the month, this bank, financial institution, or other entity has access to $326.66 of float each day. And it can earn interest on this float.

Changes in Average Daily Float Over Time

Average daily float in the banking system as a whole increased during the 1970s due to an increase in the use of checks, high inflation, high-interest rates, and the common practice of drawing funds from faraway banks in order to take advantage of remote disbursement, or transportation float.

Average daily float reached an all-time high of $6.6 billion in 1979. The Monetary Control Act of 1980 resolved many of the issues that had contributed to high average daily float in the 1970s, while the increasing use of electronic funds transfers in the 1990s reduced average daily float to $774 million by 2000.

Related terms:

Berkshire Hathaway

Berkshire Hathaway is a holding company for a multitude of businesses, run by chair and CEO Warren Buffett. read more

Check

A check is a written, dated, and signed instrument that contains an unconditional order directing a bank to pay a definite sum of money to a payee. read more

Checking Account

A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more

Clearing

Clearing is when an organization acts as an intermediary to reconcile orders between transacting parties. A clearing bank approves checks for payments.  read more

Days Sales Outstanding (DSO)

Days sales outstanding (DSO) is a measure of the average number of days that it takes for a company to collect payment after a sale has been made. read more

Ending Inventory

Ending inventory is a common financial metric measuring the final value of goods still available for sale at the end of an accounting period. read more

Federal Reserve System (FRS)

The Federal Reserve System is the central bank of the United States and provides the nation with a safe, flexible, and stable financial system. read more

Float

The float is essentially double-counted money: funds within a financial or banking system that are briefly accounted for twice due to the time gap in processing deposits or withdrawals that are often in the form of paper checks. read more

Inflation

Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. read more

Liquid Market

A liquid market is one where there are many bids and offers and participants can easily enter and exit for minimal transaction cost. read more