Disbursement

What Is Disbursement?

‘Disbursement’ is a term that describes the outflow of funds to aid transactions.

It is done through cash or other modes of payment as appropriate. It could be done for purchases as in those done to businesses, for giving out loans, for payment of investment dividends to shareholders, and so on.

It also captures payments done by a middleman, such as those done by an attorney on behalf of a client. In the case of an escrow, students’ fees are paid on their behalf from student loans, among others.

Disbursement is part of ‘cash flow’. One of the early warning signs of bankruptcy is cash flow in the negative, that is, disbursements exceeding revenue.

Deeper Definition

‘Disbursement’ refers to payments made by a company or an individual in cash or its equivalents over a defined time frame, e.g., a year.

It is essential to keep track of such transactions because it helps to record and manage the spending done within that period, and it is typically done using a ledger.

Ledger entries for disbursement are expected to include the date, payee’s name, amount debited or credited, payment method employed, and purpose of the payment.

Each user of the ledger lists items based on their line of business. For instance, a salesperson will include payments for the procurement of goods. This is unlike a manufacturer, who will most likely have the cost of raw material purchases.

Disbursements are generally of two(2) types: controlled and delayed.

In the case of controlled disbursements, cash flow is managed such that withdrawals are delayed. This is to allow for higher interests to accrue on the amount in the account. Corporate clients of banks are usually exposed to these privileges.

Delayed disbursements work such that the payment process drags out unnecessarily.

When banks could only process payments upon receipt of the original check, payments with checks on banks located in remote regions delayed debits to the account drawn by up to five(5) business days. The widely-accepted and used electronic copy of checks in place of paper checks has made this option defeated.

Disbursements are often thought to be drawdowns. It is important to note that a drawdown on an account implies an allocation.

Disbursement Example

A withdrawal of $100,000 from a $450,000 trust fund account is a disbursement from the account and a drawdown of $100,000.