Commercial float

economic-dictionary

The commercial float is related to commercial operations and is the period of time that occurs from the moment the selling company delivers the product or provides the service to the buyer and the moment the invoice expires.

In other words, it is the time it takes for an operation to become effective, from the beginning of the negotiations until the invoice expires and the payment has to be made.

Commercial operation is understood to be any activity between companies that involves an exchange of assets. For example, an order to a supplier whereby the buying business receives the raw material and, in return, sends an amount of money to the seller.

Meaning of commercial float

The commercial float is the same for both parties to the same transaction, buyer and seller. However, the buyer might be interested in lengthening it, while the seller might be interested in shortening it.

Thus, a company that buys raw material will be interested in receiving the material as soon as possible and paying as late as possible. That is, it will seek to expand the commercial float. This will allow you to maintain a certain level of liquidity and meet other more urgent payment commitments with shorter deadlines, such as, for example, the payment of the debt contracted with the bank.

In this course, the company will gain in time and flexibility until it receives other pending income, for example, from one of its distributors. In cases of illiquidity, this flexibility could even save the life of the company. With this money received from the distributor, you will then pay the supplier. From this it is feasible to deduce that the company that buys the raw material is financing itself at the supplier's expense, in a certain way.

However, the provider will prefer to collect the money as soon as possible, of course. First to avoid future defaults or defaults. But also to face unforeseen events that demand liquidity, meet financial commitments, make investments or undertake new projects. Therefore, the seller will seek to shorten the commercial float.

A good current asset manager should aim to reduce both the commercial float and the financial float.

Example of commercial float in Spain

The late payment law in Spain aims to establish measures to address this problem in commercial operations, as well as to avoid abuses in setting payment terms. This establishes that the payment between private and / or public companies must be made within a maximum period of 30 days from the delivery of the invoiced products or services, as long as a different one has not been agreed between the parties. In the event of a separate agreement, the term may not exceed 60 days.

In the event of non-compliance, default interest will be applied to the debtor.

From this it follows that companies can invoice on a daily basis. However, there are businesses that prefer to accumulate all the invoicing and carry it out at the end of the month, almost financing themselves at the expense of the suppliers. This hurts the seller, who sees his trade float widen, when it could actually be shorter if the buyer paid earlier.

For this reason, some companies use commercial tools that incentivize them to pay promptly, such as the cash discount, for example.

The commercial float could be the counterpart of the value date in the banking environment.

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