Business Disbursements: The Essential Guide
What is a disbursement? And what is the disbursement of funds? Understanding these definitions — and knowing how disbursements differ from other types of cash outflow like 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 continue 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 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 sure 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? Let's dive into the essentials of disbursements.
Why Does Tracking Disbursements Matter?
Disbursements should be tracked the same way as other cash outflows regarding accounting. But there is a crucial difference between payments, disbursements, and reimbursements: Taxes.
Different taxes, VAT, or deductions may apply depending on the transaction. Keeping these three types of payout separate can help your accounting team ensure accuracy and help leaders make informed budgeting decisions.
What Is a Disbursement?
Disbursements can be confusing simply because a few different definitions fall under the term "disbursement." 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 fee that might be made to a third party on behalf of a client). A disbursement also refers to the cash movement from one business to another so the receiving business can purchase using those funds.
In other words, a disbursement 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. Disbursements can be made via cash, checks, vouchers, ACH payments, or digital payment options.
To record a disbursement, you need to be sure to include the following:
- Reason for the disbursement
- Date the disbursement is made
- Name of the individual or party receiving the disbursement
- The total amount of the disbursement
- 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 outflow is. After the disbursement is made, the cash balance of your business should be updated to reflect the movement of funds.
For finance organizations in everyday businesses, a disbursement usually refers to paying out funds. As companies grow, they will likely need to set up separate accounts holding dedicated funds for different disbursements to track cash flow better.
How Is a Disbursement Different from a Payment?
Disbursements and payments are very similar, but a few technicalities make them distinct.
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 before 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.
Some examples of disbursement are:
- Raw materials
- Loan payouts
- Shareholder dividends
The important thing to remember is that disbursement of funds is simply the paying out of cash from the business's bank account to another party's bank account. Often, a disbursement is related to business operating expenses.
When Can I Categorize a Payment as a Disbursement?
The line between types of cash outflows can seem blurred, almost subjective. But there are some ways to better determine which is a payment and a disbursement.
When mapping your budget or payment strategy, ask yourself these questions:
- Does your client allow you to pay for them (but the client is ultimately responsible for payment?
- Has the client received or used your goods and services?
- Did you pay a supplier in place of your client (i.e., raw materials, inventory, etc.)
- Does your client know your products or services come from another supplier or vendor?
- Do you need to pass on expenses to your client in your invoice?
If you said "yes" to most of these questions, your transaction will likely be a disbursement.
How Is a Disbursement Different From a Reimbursement?
There's also a difference between disbursement and reimbursements of funds.
Reimbursement is an 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 unsatisfied with her product or service, she can request reimbursement and have that money refunded. Reimbursements must be accounted for differently than disbursements since they are the act of paying someone back.
Meanwhile, 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 all misnomers.
The proper term for a disbursement is simply a "disbursement," and a "disbursement payment" doesn't exist because your finance department is either making a payment or a disbursement. While both 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 for 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 time during the year or quarter and include any payouts done in cash or cash equivalents, such as ACH payments, EFT payments, checks, eChecks, or digital payments. Differentiating a cash disbursement from other 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. Different accounts for different types of disbursements allow businesses to determine which checks will be posted to their bank account on any given business day. Maintaining other 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 electronically. Note that this does not include cash or checks. However, a digital disbursement consists of a disbursement made via eCheck, ACH or EFT, direct deposit, or any other form of digital payment.
Ultimately, how you handle your disbursements will impact how you do business and your company's overall success.
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 allow you to pay 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.
When selecting your disbursement method, it's essential to consider the following:
- If you plan to use digital or traditional disbursements.
- The security and compliance measures of your solution.
- Whether or not you can customize your disbursement solution.
- What integrations are available.
- If it can automatically report transactions.
With the proper disbursement solution, you can pay your beneficiaries faster and more securely. On top of that, your finance organization can save time and money like never before.
Are you ready to unlock the potential of digital disbursements? Schedule a demo with us today.