Almost everyone will receive a disbursement at some point. Governments, companies, lenders, and other organizations all disburse money as part of doing business. Disbursements are a key ingredient in commerce everywhere, keeping the global money supply flowing.
What is a disbursement?
The word disbursement often applies to the funds an individual receives from an organization, including (but not limited to):
- The paycheck a worker gets from an employer
- The money a retiree withdraws from a tax-deferred retirement account
- The money a borrower gets from a lender to buy a car or pay for school (known as a “loan disbursement”)
- The cash a stockholder enjoys from corporate dividends
- Economic stimulus checks during the coronavirus pandemic
Disbursements can also flow from a large organization to a smaller one; for example, federal student loans and financial aid are issued as disbursements to cover tuition and fees and other expenses.
A disbursement may also be used to cover payments for work on behalf of a client. For instance, a lawyer may pay court fees or copying costs for a client or a shipper may pay the duty and tax on a package. These are known as disbursement fees, and they’re added to the bill to cover the outlay.
Disbursement vs. payment
A disbursement is a form of payment. The payer transfers cash or its equivalents to a payee’s account, and the transfer is recorded as a debit to the payer and credit to the payee.
A payment generally involves a set value for a product or service that’s paid directly to the producer or distributor. The payment doesn’t have to come from a much larger account, as a disbursement generally does. A payment also can be made with funds the payer doesn’t own, as with a credit card. At the most basic level, buying groceries involves a payment, not a disbursement.
Disbursements and payments are usually accounted for differently in a company’s books, especially for tax purposes.
How do disbursements work?
When an organization initiates a disbursement, it sets a transfer of money in motion via cash, check, or most likely these days, electronic funds transmission. Although the mechanics of moving money can be quite involved, the bottom line is that the payer's account will be debited, while the recipient's account will be credited. The transaction will be registered in the organization’s disbursement journal.
Disbursement records document how much cash is flowing out of the business or organization, where it’s going, and for what purpose. Date, name, amount, and payment method are all part of the record-keeping.
Organizations record their disbursements to help monitor their financial health. The timely, accurate accounting of disbursements can help an organization head off trouble by showing whether it’s shedding cash more quickly than it’s generating revenue. This could be a warning sign of financial distress. Record-keeping for disbursements also enables a company to meet audit requirements, spot potential fraud, and make realistic plans.
Accounting and finance departments or professional bookkeepers generally handle disbursement records. They document each disbursement and post it to the appropriate ledgers. When the funds are disbursed, the company adjusts its cash balance to account for the funds transfer. This provides an up-to-the-minute snapshot of a company’s cash position and available funds. Managers can review the disbursement records to see how cash is being spent and check for any surprises.
Organizations often consider disbursements in their overall cash-management strategies. A business wants to hang on to funds it knows it will eventually disburse for as long as possible to maximize the interest the money generates. While a single disbursement may not provide a significant bump in interest income, organizations with huge global payrolls or large dividend obligations can benefit from extending the time that interest accrues on their soon-to-be-outgoing funds.
Types of disbursements
The type of disbursement depends on the type of business or organization: Manufacturers may disburse funds for raw materials, retailers may spend on finished goods, and the federal government may send money to retirees. Some of the main types of disbursements are:
- Controlled disbursement. In a controlled disbursement strategy, organizations review and prioritize the pending disbursements. They maximize their cash by selecting the payment and funding options with the greatest potential for boosting interest income. The payer keeps its high-interest earning assets invested so they continue generating profit and uses lower-earning assets to cover immediate disbursement needs.
- Delayed disbursement. With a delayed disbursement cash-management approach, a company makes payments using checks drawn on banks in remote areas. The checks from these far-away banks take longer to get to the recipient, extending the time the funds backing the checks stay in the payer’s account. The delay increases the potential for extra interest income. In the US, the widespread use of electronic checks has limited the opportunity to benefit from delayed disbursement. However, the strategy still exists in some developing regions.
- Disbursement check. A disbursement check is a payment from a business account. The checks can cover payroll expenses, workers’ salaries, dividends, payments to suppliers, vendors, and contractors, as well as other business-related expenses. Recipients can cash or deposit disbursement checks as they would a regular check. However, some banks may release only a portion of the full amount until the check clears. This delay can buy time for interest to accrue for the payer.
- Disbursement voucher. An organization uses a disbursement voucher to request a payment for an individual or entity that has sold merchandise or provided a service. After the transaction is completed, the voucher generates the payment, generally through a bank that clears the check or money transfer. Disbursement vouchers can be issued as payment or partial payment for goods or services; reimbursement for items the recipient has paid for; or an advance for work or items not yet begun. A voucher helps an organization extend the time before it must disburse the funds and keep the cash for itself for a longer period.
Disbursement or drawdown?
The term disbursement often intersects with a similar term—drawdown. However, the two represent different financial concepts. A disbursement, in its most general form, is a payment that’s transferred from a payer’s account to a payee’s account. A drawdown is a measure of the decline of an account.
A drawdown can result from a disbursement. For instance, a person who withdraws money from a 401(k) account or receives an installment from a loan is getting a disbursement of those funds. The disbursement, in turn, reduces the money in the account or decreases the balance of the loan. In these cases, the disbursement causes a drawdown, reducing the remaining funds.
The bottom line
Disbursements are payments from a company, organization, government, or another payer that are generally issued to a smaller recipient in the form of cash, check, electronic transfer, or other remuneration. The money is drawn from a dedicated account as a debit and transferred to the recipient’s account as a credit. The details of the transaction are recorded.
Companies make disbursements when they issue paychecks, pay dividends, or buy supplies, among their numerous other activities and obligations. Individuals receive disbursements in the form of paychecks, loans, and proceeds from investment funds, among other sources.