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Latticework of Mental Models: Float

About 12 years back, I first came to Bangalore to join my first job in IT industry. Known as city of lakes and the silicon valley of India, Bangalore was the place to be in.

However, the initial euphoria soon evaporated when I was told by the real estate agent that renting a house required me to deposit an advance. What added insult to the injury was the size of security deposit amount. It was supposed to be 10 months of rent.

Holy cow! That was several times more than my monthly salary at that time.

But it turned out that the practice was pretty common in Bangalore, and still is, which I suppose is not the case in other metros.

It infuriated me that the house owner would conveniently put that advance money in his bank and pocket the interest income too. So in effect he wasn’t just making money from rent, but from free deposit also.

Now here is an interesting question to puzzle over. The security deposit which in effect was a borrowing for the house owner – can we call that money as debt for him?

Yes and No. ‘Yes’ because it’s not his money and he would have to return that money sometime in future and ‘No’ because he doesn’t have to pay any interest on this borrowing.

So it’s a debt but quite different from a traditional debt. Let’s see how.

When I moved out from his house, the money which he returned to me was replenished by the new tenant. So it was a revolving fund. Effectively he would never have to return that money to his tenant, provided he doesn’t run out of tenants, which is unlikely because his house was in busy locality in Bangalore.

The deposit was an income generating asset which costed the landlord nothing. He could very well be using that money for making other investments too, like buying stocks or making down payment for another house.

So this is a very interesting type of debt. It’s called Float.

Here are the three characteristics of Float which separates it from the plain vanilla debt.

  1. There is no collateral in float. If the house owner refuses to return my security deposit, there is no easy way for me to recover my money.
  2. There is no, as we saw, interest either. The house owner doesn’t pay any interest on the money that he borrowed from me.
  3. It’s long enduring i.e. you don’t have to return the money. The security deposit was a revolving fund and hence always available.

So we see that conventional debt is onerous. But this float thing sounds like a ponzi scheme, doesn’t it?

Well, it’s not just the case of security deposits, there are numerous other businesses which use this idea of float to generate better returns on their capital.

In fact, there is a whole industry which is founded on the idea of float. Can you guess? The insurance business.

Insurance Float

Those who are familiar with Warren Buffett and his company Berkshire Hathaway, know that Buffett built his business empire by using the float from his insurance subsidiaries.

According to him, Float, is in effect, the money that we are holding that eventually will go to other people, but of which we have temporary possession.

So how does float work in insurance business? Let’s hear straight from the horse’s mouth. Buffett’s wrote in his 2002 letter to investors-

…float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an “underwriting loss,” which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money. Moreover, the downward trend of interest rates in recent years has transformed underwriting losses that formerly were tolerable into burdens that move insurance businesses deeply into the lemon category.

For a typical insurer, the premiums it takes in do not cover the losses and expenses it must pay. That leaves it running an “underwriting loss” – the cost of float – which is the functional equivalent of interest on conventional debt.

So the float is useful in insurance only if the cost of float is less than the prevailing interest rates. A low cost float is great but what’s even better is a free float i.e. one where the cost of float is zero. Now, this calls for an insurance business to run its operations efficiently and ensure that the insurance premiums are commensurate with the risks.

That’s precisely what my landlord was enjoying. A free float. And with increase in rent every year, which resulted in bigger security deposits, his float was increasing too.

There is no dearth of businesses which generate float. Even a loss making insurance business generates float but what makes float attractive is its low cost. There is no other form of financing better than free float. Or is there one?

Wait! There is one, at least for Warren Buffett because he’s always one step ahead. Most of Buffett’s insurance business have a negative cost of float (better than free) which means his businesses are run super efficiently. Buffett writes –

If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it. That’s like your taking out a loan and having the bank pay you interest.

To see how important the idea of float is for a business, let’s invert the problem. Assume that a business can’t generate float. What are the other source of funds to replace the float?

Debt? But conventional debt isn’t free, rather it’s quite expensive. The interest on debt will reduce the earnings. What about equity? Well, raising money through equity will lead to dilution. Not a desirable option for existing shareholders.

The more of an asset that you can fund with a free float, the less the need to fund it with expensive debt or equity becomes.

Berkshire’s Float

Buffett’s tryst with float started in 1960s when the salad oil scandal attracted his attention to American Express. The scandal created a one time liability of $150 million for Amex which tanked the stock price. However, Buffett discovered something interesting in Amex’s balance sheet.

Amex was carrying a liability of half a billion dollars which was money paid to Amex by its customers in lieu of a piece of paper, i.e. Traveller’s Cheque. There was neither any collateral nor any interest associated with liability. The paper was redeemable at demand, but there was always a lag between issue and encashment and sometimes people even forgot to encash them. More importantly, when people encashed them, there were others who bought new TCs, so the balance in the liability account had become a “revolving fund.”

It was a no-brainer for Buffett to pull the trigger on a heavily loaded gun. He accumulated 5% of Amex, amounting to a total of 40% of Buffett’s total portfolio at that time. Within two years that investment multiplied by more than 2.5 times. Float baby float!

Today, Berkshire’s insurance operations generate a float of $88 billion with an underwriting profit of $1.8 billion. Isn’t it incredible that Buffett is getting paid in billions for holding on to other people’s money?

That’s the magic of float.

Few More Floats

The simplest example of a float is the gift card issued by retailers. Yes, that Amazon gift card! The issuer gets paid for it upfront, and there is quite a bit of lag until the giftee uses it. And there are people who only make a partial use of the gift card leaving free money on the table for the issuer. Some even forget to encash the gift card and some gift cards expire before they can be used. More free money!

No wonder many consider gift card industry the biggest billion dollar scam.

Can you think of some more examples of float around you? Here are few that comes to my mind –

  1. The tickets that you book (airlines and train) in advance. When a waitlist train ticket is booked 2 months in advance only to be cancelled (most of them) at the last moment, the money keeps lying with railways for 2 months. Isn’t that a free float? How profitably this float is used/misused is another question altogether.
  2. When you get a refund from an online-store, they usually credit your virtual wallet. That money is an interest free loan for them. However, the current regulation in India doesn’t allow these online stores to use that money for other purpose, so not exactly a real float here.
  3. If you use your credit card you get a free credit for a month from the credit card company. By the time you settle your last month’s credit card bill, you would have accumulated another month’s expenses on credit card. Effectively you’re revolving funds (equal to your monthly expenses) on your credit card. It’s a free float for you. Of course, just like underwriting discipline is required for profitable insurance operations, credit card float is useful only if you’re using it prudently and not incurring a high cost of float (late fee and astronomical credit card interests).

Source of Float

We have seen how insurance business generates float. Now if you own a non-insurance business and intend to generate float, what are your options?

Here’s what Prof. Bakshi has to say –

Businesses employ assets. These assets can be financed by (1) Equity; (2) Debt; and (3) Float. Float is preferable if it’s free or cheap and if it’s long-enduring. Recall float is Other People’s Money. Who are the other people? They aren’t equity, and they aren’t debt. So who can they be? Well there are only four main categories: suppliers (trade credit, deposits from distributors), customers (advance from customers), employees and government (deferred taxes). Let’s focus on suppliers and customers.

What kinds of businesses are those where suppliers and/or customers provide float? Those with moats. [These are the] businesses which dominate their markets [and] can dictate their terms.

Suppliers will provide lenient credit and not charge higher prices (no implicit interest). Customers will pay in advance and not ask for cash discount (no implicit interest). Distributors will give interest free deposits.

Negative working capital without implicit interest.

Amazon is one such businesses which funds all its assets (including fixed assets, receivables and inventories) by other people’s money (account payables and accrued interests). As per 2015 annual report, their negative working capital is more than $13 billion. And it’s growing every year.


When you buy something from Amazon, they get the money almost immediately but most of the distributors/publishers don’t get their payment until 90 days. The bigger Amazon grows, the more cash it gets to hold. The faster it turns the inventory, the bigger its cash grows.

Most people just look at a company’s margins and judge the quality of the business model based on that, but the cash flow characteristics of the business can make one company a far more valuable company than another with the exact same operating margin. Amazon could have had a margin of zero and still made money. (source:

And Amazon is not unique when it comes to creating floats using negative working capital. Lot of FMCG companies, like HUL, have strong moats because of this kind of float in their balance sheets.

Mahindra holiday’s (MHRIL) is another business with an interesting business model which generates large amount of float. As of 2015, the company had advances from customers totalling to Rs. 1500cr, which is more than 50% of the balance sheet.


However, the receivables are also pretty high (Rs. 870 cr) which offsets the float quite a bit but you need to dig further and find out what’s going on here.

Consider it as your homework for today 🙂

Nesco, the company behind Bombay Exhibition Center, also carries float on its balance sheet. It gets the exhibition fee in advance. Not just that, the commercial space that Nesco has leased out generates float in form of advance security deposits.


The standard accounting calculations consider the float as normal liability, like conventional debt, which introduces inaccuracy in evaluating a business’s true value. Presence of large float in a balance sheet can skew the real picture.

Buffett, in his latest (2015) letter to shareholders, writes –

So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of float as strictly a liability is incorrect. It should instead be viewed as a revolving fund. Daily, we pay old claims and related expenses – a huge $24.5 billion to more than six million claimants in 2015 – and that reduces float. Just as surely, we each day write new business that will soon generate its own claims, adding to float.

If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises – because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced. The two types of liabilities, however, are treated as equals under GAAP.

So we learnt that float is an important mental model to think about businesses especially if you’re looking for hidden moats.

Now before I wrap up here, let me take the risk of sounding like a broken tape. Because we can never over-emphasize the importance of building these mental models.

If you’re into the business of long term investing, these mental models are the tools that help you navigate smartly. These big ideas from multiple disciplines, give you a tremendous edge as an investor and as a thinker. There, I said it again – like a broken tape.

Take care and keep learning.

Notes: Many examples that I have quoted in this post come directly from Prof. Bakshi’s MDI lecture – Floats and Moats. It’s a must read.

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About the Author

Anshul Khare worked for 12+ years as a Software Architect. He is an avid learner in various disciplines like psychology, philosophy, and spirituality with special interests in human behaviour and value investing. You can connect with Anshul on Twitter.


  1. Akbar Khan says:

    Hi Anshul, Thanks for that explanatory note on floats. What would happen in the case of negative interest rate scenario like the one in Japan or Europe. Will the huge float of Berkshire become a real liability when interest rates turn negative?

    • Anshul Khare says:

      That’s a good question to think about Akbar. I don’t think I know the right answer to that but here’s my two cents –

      One of the characteristics of a float is that it’s enduring. Question is how enduring the negative interest rate scenario will be?

      If one assumes that negative interest rates would last for years together, it would be an attempt to bet on macros.

      How confidently and successfully can a small investor predict that?

  2. Mahesh Lotake says:

    Hi Anshul,

    Other examples of floats are:
    Traveller’s cheque from AmEX.
    Payment of annual maintenance fee for electronic equipments – washing machine, AC, water purifier.
    Advance payment for a year service – Pest Control takes 1 yr fee for a 3 services in advance.
    Colgate (toothpaste) company also enjoys float.
    Food coupons/meal vouchers by Ticket Restaurant, Sodexo.

  3. Parag Bharambe says:

    Few years back (maybe ten years), when I heard the word Float, I tried to look for the good source of information, but I could not find any. Although, lot of Buffet fan were talking about Float, there was not a good explanation around (at least I did not find it).
    Anybody, who is in the same position today as I was earlier about learning Float, would not have to go anywhere. This is the place to learn a good deal about flat. You have nailed it.
    Excellent easy to read description of the Float.
    Thank you very much.

    • Anshul Khare says:

      Thanks Parag!

      The real credit for most of the insights in this post goes to Prof. Bakshi. All his posts on floats are must read.

      • Thanks Anshul. I will read Prof Baskhi’s post you have mentioned.

        Few other examples of Floats;

        I think it would not be an exaggeration to say that the large part of Amazon model, is funded by Float, which you have mentioned. But there is even bigger Float related to Amazon, in my view, and that is Prime membership.

        In order to become the prime member, you pay the annual fee of £79 (UK) upfront. This entitles a user for next day deliveries on many Amazon items as well as access to their video service. The upfront payment removes a “Pain of Payment” once you pay. After that, a user does not have to bear the pain of delivery payment again, which in turn drives more sales on Amazon (and more money in their coffer).

        Costco is another example. To become shopper at Costco, a user has to become a Costco member by paying £25 each year in advance. That is a big float particularly if you consider that they have millions of customers.


  4. Shashikant says:

    Hi Anshul,

    Thanks for sharing information on float.

    Another eg. might be IRB Infra in form of advance monthly toll. right?

    • Anshul Khare says:

      Hi Shashikant,

      I haven’t looked at the IRB infra.

      But if they collect the money from customers in advance, that sounds like a float.

  5. Navin Naidu says:

    Very well explained, I have shared the frustration of missing interest on the huge advance deposit for renting a home in Bangalore.

  6. Kamal Sharma says:

    Hi anshul
    Thanks for great information on float.I thank advance gas connection amount is also a free float?.

  7. Excellent piece Anshul. Keep going, God bless!!

  8. Hi Anshul,
    Thank you for a great article, it made the concept very clear.
    Regarding your homework – I looked into the MHRIL annual statement and it seems they have securitised some of the trade receivables (approx. 58crores only) to make into a ‘revolving fund’ where in they have low interest payouts but considerable liquidity. As per the notes, them seem to be making a profit on this which I didn’t understand completely.
    Isn’t it still a cause for concern though? Ideally consumers pay in advance but its clear MHRIL is selling most of its VO’s on EMI’s and then securitising this to create a fund for use.
    Could you please shed some light on this? Especially how to make an income/profit on securitisation.

    • Anshul Khare says:

      Hi Deepa,

      Our tribe member Ankit Kanodia recently wrote a research report on MHRIL as part of Safal Niveshak Value Investing contest 2015.

      I would request him to answer your question.

    • Ankit Kanodia says:

      Hi Deepa,
      Since Anshul asked me to respond to your question, I will try to explain my understanding with a disclaimer that it’s my own personal view and I reserve the right to be wrong. 🙂

      I suppose your query is regarding securitization of receivables. First of all, securitization is a very common transaction which large corporates enter into to improve the liquidity position of their company. For MHRIL, let’s assume there are two scenarios:

      1. Where the member pays upfront the fees of say Rs. 100. Hence no debtors arise.
      2. Where the member pays in EMI for three years the total of which comes to say Rs. 110.

      In the second scenario there is an option for the company to securitize the receivables today at a minimal cost. So the company receives say 110 – 5= 105 from the securitizing company (5 being it’s interest cost). But if the customer stops paying the installment midway, the securitizing company has recourse to MHRIL, wherein MHRIL has to return the amount to the securitizing company which the customer is not going to pay. But in this process there is a possibility of a minor profit for MHRIL, if the consideration received from securitization company is more than the principal amount of total receivables being securitized after netting of reversals in case of cancelled members. One can learn more about it from note 28 of annual report 2014-15.

      There is no separate mention of interest on securitization in the annual report. I assume the company has clubbed it under interest on short term loan.

      Regarding the nature of float and whether it is a long enduring one or not, one can read the report in the link below:

  9. Great article Anshul ji.
    The deposit the school collect from all the students is also a float.
    A kids gets into a school in pre-kg class & mostly leaves the school after 12th standard.

    So school uses that money for almost 13/14 years without interest. And if the school multiplies /Doubles that money in every 3 yrs just like mf. Pabrai does, just imagine how much money the school earn just from deposit forget about the monthly/yearly fee they collect.


    • Anshul Khare says:

      Thanks Kishor!

      Yes even deposit in school is float. However, I doubt if those schools have access to anyone like Mr. Pabrai to double their money every 3 years 😉

  10. Deepa Bhatia says:

    Thank you Anshul and Ankit.

    A really well researched and thought out analysis Ankit. I hope one day I will be able to do the same on my own.




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