The Complete Guide to Disbursements
What is a disbursement? And what is the disbursement of funds? Understanding these definitions — and knowing how disbursements differ from reimbursements and payments — is critical to ensuring your business avoids accounting errors that could be detrimental to your bottom line.
Additionally, as more payment and accounting software continues to be developed, and more AP and AR processes move online, it’s essential to make sure that your business is offering up-to-date information when it comes to your vendors, contractors, team members, and anyone else who’s impacted by your company’s services. Knowing the difference between making a payment and disbursing funds can make or break your finance department, especially since understanding this distinction can prevent things like double spending, unnecessary fees, and failed tax audits (in fact, disbursements and payments are accounted for in different ways, which is something to take note of if you want to be certain you’re doing taxes correctly for your business). Plus, ensuring that your company maintains compliance will guarantee its success in the long term.
So, are you ready to optimize your AP department and build a finance organization that operates seamlessly? Check out our quick guide that covers everything you need to know when it comes to disbursements:
What is a disbursement?
Disbursements can be confusing simply because there are a few different definitions that all fall under the term “disbursement.”
A disbursement, in its most basic sense, is the act of paying out money and may differ from profit or loss. Usually, a disbursement is the transfer of funds from one business’s bank account to another bank account. A disbursement can be made via cash, checks, vouchers, or through digital payment options. To record a disbursement, you need to be sure to include the reason for the disbursement, the date the disbursement is made, the name of the individual or party receiving the disbursement, the total amount of the disbursement, and the payment method in which the disbursement was made. Being sure your finance team keeps track of these details with each disbursement is essential because it will allow you to more easily monitor your business’s operations and track where your cash flow is going. After the disbursement is made, the cash balance of your business should be updated to reflect the movement of funds.
Disbursements fall under several different categories, which is why the term itself can be confusing. A disbursement might refer to a delivery of a loan amount to a borrower, the payment of a dividend to shareholders, or a payment made by an intermediary (for example, a lawyer’s payment that might be made to a third party on behalf of a client). A disbursement might also refer to the movement of cash from one business to another so the receiving business can make a purchase using those funds.
For finance organizations in everyday businesses, a disbursement usually refers to paying out funds. As businesses grow, they will likely need to set up separate accounts that each hold dedicated funds for different kinds of disbursements in order to better track cash flow.
How is a disbursement different from a payment?
Disbursements and payments are very similar, but there are a few technicalities that make them distinctly different. Payments are the movements of funds from a buyer of a product or service to the seller of that product or service. Usually, to purchase a product, the buyer must initiate the payment before receiving the product that the payer is selling. When it comes to services, services are often rendered prior to receiving payment. However, every business is different, and the order in which sellers receive payments for their products and services is up to each individual.
Disbursements, on the other hand, usually come from dedicated accounts and are not solely made to pay for products and services. For example, a disbursement could be made to an employee when it’s essential to give her cash to spend on a specific product or service that’s relevant to the business.
The important thing to remember is that a disbursement of funds is simply the paying out of cash from the business’s bank account to another party’s bank account.
How is a disbursement different from a reimbursement?
There’s also a difference between a disbursement and reimbursements of funds.
A reimbursement is the action of repaying an individual, business, or third-party money that is owed to them for any particular reason. For example, if a customer is not satisfied with her product or service, she can request a reimbursement and have that money paid back to her. Reimbursements must be accounted for differently than disbursements since they are the act of paying someone back.
So, what are disbursements, and how do they differ? Remember, disbursements are simply payouts of money from your business's bank account, and they are recorded differently than reimbursements and refunds.
What is a disbursement payment?
Sometimes, a disbursement is referred to as a disbursement payment, a payment disbursement, a disburse payment, or a payment disbursed; however, these are actually all misnomers. The proper term for a disbursement is simply a “disbursement,” and a “disbursement payment” isn’t actually something that exists because your finance department is either making a payment or making a disbursement. While both of these actions require money to be paid out of the business, they need to be recorded and accounted for differently since they each have different consequences when it comes to your cash flow.
What is a cash disbursement?
A cash disbursement is the outflow of cash from a company to settle obligations such as AR, operating expenses, interest expenses, and more. Cash disbursements are made during a specific period of time during the year or quarter and include any payouts that are done in cash or cash equivalents, such as ACH payments, EFT payments, checks, eChecks, or digital payments. Differentiating a cash disbursement from other types of disbursements helps you better manage your cash flow.
What is a disbursement account?
A disbursement account is a designated account for making disbursements from your business. Having different accounts for different types of disbursements allows businesses to determine which checks will post to their bank account on any given business day. Maintaining different disbursement accounts also makes it easier for your finance organization to gain better control over cash flow, avoid overdraft fees, make disbursements on time, and ensure solvency.
What are digital disbursements?
Digital disbursements are disbursements that are made digitally. Note that this does not include cash or checks. However, a digital disbursement does include a disbursement that’s made via eCheck, ACH or EFT, direct deposit, or any other form of digital payment.
Ultimately, how you handle your disbursements will impact the way you do business and the success of your company overall. For example, by initiating disbursements quickly, you’re more likely to ensure that you will have happy and loyal employees, sellers, and partners. Digital disbursement solutions enable speedier transactions and also allow you to make payouts to individuals, businesses, and third parties globally and at any time.
What are the best practices for disbursements?
Choosing the right disbursement method allows your finance organization to process disbursements at a lower cost, streamline your operations, save time, and protect your business from fraud.
The ideal disbursement solution will be one that enables digital disbursements and is compliant, secure, and falls in line with regulations for different regions if you are planning to make disbursements globally. Additionally, your disbursement solution should be easy to use, should be customizable to specific use cases and integrations, and should make it possible to automatically report transactions.
When you have the right disbursement solution at your disposal, you’re able to pay your beneficiaries faster and more securely. On top of that, your finance organization is able to save time and money like never before.
So, are you ready to unlock the potential of digital disbursements? Schedule a demo with us here.