Devoted to Managers and those that seek to improve their management skills

Understanding the Principle of Float

While the importance of "float" has been pretty well known for a long time, many business leaders and managers really don't understand the potential that it they miss out on by not concentrating more attention on it.

Warren Buffett has added tremendous value to Berkshire Hathaway (BRK-A) by his investing of "float."

For Buffett and Berkshire, the majority of their float is from their insurance premiums that haven't been paid out in claims. A simple way of saying that there's money lying around that hasn't been spent. Buffett takes that money and invests it for the company.

I encouraged them to take the money and at minimum put it into an account that would give them about 5 percent. As it was the company was leaving a lot of money on the table by not moving the money to another type of account. There are a number of businesses that have money of this type sitting around doing nothing.

Here's another one that you may not think of: gift cards. You may not know it, but over 50 percent of gift cards are never redeemed. What does that mean to a company? They have a lot of money received that will never be converted to goods. That's float.

Most companies know what these percentages are and should put that money into something that works much harder for them.

But think of the power related to the gift card business. Even if you don't invest the money, it is already working hard for you because of the percentages of cards never redeemed. In other words, the system itself is an investment, even if you don't reinvest the money (which you should). You're basically getting a 50 percent return on your money before you even invest it.

Float is money that is sitting around that may never be used, or is used slowly over a period of time, which you can use to multiply while you're sitting on it. Learn to look for areas where you have float and how you can use it to grow your profits. It's a powerful tool not understood by a lot in management.