Average Float Balance (2/14)

Account Analysis consists of balances and fees which comprise a basic math calculation. There are 14 balances that I refer to as "Remember the Math". I will discuss all 14 in 14 different posts.

Average Float Balance

When I think of how to explain what is Float I think of banking.  On my bank statements, I usually see a line titled "Current Balance" and another line titled "Available Balance".  The "Current Balance" shows the amount of funds in my account plus any pending cash inflows or outflows in the form of debits or credits.  Since these are pending transactions, they have not cleared my account yet but will soon (usually in the next 1 or 2 business days).

So, since the money is still technically "in" my account it is accounted for in "Current Balance".  However, since that money is "reserved" for a pending transaction(s), it is not available for me to use so it is not accounted for in the "Available Balance" field.

For example, below are a list of transactions which occurred on 01/15/2013:

Beginning Balance: $305.67

Deep Dish Pizzeria ~ $26.99 (Pending Debit)
Hot Yoga Class Package ~ $52.00 (Pending Debit)

Current Balance*: $305.67
Available Balance: $226.68

Where is the $78.99?  It is "floating"...

The two pending debit transactions which amount to $78.99 are still included in the Current Balance but are excluded from the Available Balance because the Available Balance indicates the amount of funds the account holder has "available" to withdraw, invest, transfer, etc.

The Float Balance is the daily recorded balance for all pending transactions while the Average Float Balance is the sum of those daily float balances over the period divided by the number of days in that period.  

Since the Average Float Balance follows the Average Net Ledger Balance in the "Remember The Math" calculation, the Average Float Balance is that part of the ledger balance that is not available (pending) to the bank for its use and thus not available to the account holder for their use.

In some explanations, Ledger Balance is the "Current Balance" from my example above.  Ledger is the total sum of all transactions posted to an account but Float are those transactions subtracted from Ledger to arrive at your Available Balance; which is balance #3 of the 14 in my Remember The Math series.

This is how I grasped the concept of Average Float Balance.

Happy Analyzing!

*Many financial institutions have varying titles for this balance.