Cash Disbursement

What is a Cash Disbursement?

A cash disbursement is an amount of money that flows out of the company’s accounts or petty cash boxes. It is an expenditure that can be classified differently depending on the nature of the disbursement.

To a business, disbursement is part of cash flow. It is a record of day-to-day expenses. If cash flow is negative, meaning that disbursements are higher than revenues, it can be an early warning of insolvency.

A disbursement is the actual delivery of funds from a bank account.

What Does Cash Disbursement Mean?

A cash disbursement is the outflow of cash paid in exchange for the provision of goods or services. A cash disbursement can also be made to refund a customer, which is recorded as a reduction of sales. Yet another type of cash disbursement is a dividend payment, which is recorded as a reduction in corporate equity.

A cash disbursement can be made with bills or coins, a check, or an electronic funds transfer. If a payment is made with a check, there is typically a delay of a few days before the funds are withdrawn from the company’s checking account, due to the impact of mail float and processing float.

Cash disbursements are usually made through the accounts payable system, but funds can also be disbursed through the payroll system and through petty cash.

The cash disbursement process can be outsourced to a company’s bank, which issues payments as of the dates authorized by the paying entity, using the funds in the entity’s checking account.

How Disbursement Works

In bookkeeping, a disbursement is a payment made by the company in cash or cash equivalents during a set time period, such as a quarter or a year. A bookkeeper records each transaction and posts it to one or more ledgers, such as a cash disbursement journal and the general ledger.

An entry for a disbursement includes the date, the payee name, the amount debited or credited, the payment method, and the purpose of the payment. The overall cash balance of the business is then adjusted to account for the disbursement.

Disbursements are a record of the money flowing out of the business and may differ from actual profit or loss. For example, a company using the accrual method of accounting reports expenses when they occur, not necessarily when they are paid, and reports income when it is earned, not when it is received.

The type of items listed in the ledger depends on the business. A retailer has payments for inventory, accounts payable, and salaries. A manufacturer has transactions for raw materials and production costs.

Managers use the ledgers to determine how much cash has been disbursed and to track it. For example, management can see how much cash is being spent on inventory compared to other costs. Since the ledger records the numbers of the checks issued, the managers also can see whether any checks are missing or wrongly recorded.

Disbursement vs. Reimbursement

Disbursement of funds is not the same as reimbursement. The term “reimbursement” refers to the payment refunded for the original disbursement.

When a business sends a disbursement on behalf of a client, the reimbursement is what the client pays to the company as a refund for the original payment. Reimbursement can involve discounts or interest fees, depending on the contract.

In general, the difference between reimbursement and disbursement is that one is the instance or process of disbursing while the other is the act of paying. From the VAT point of view, the two systems are significantly different. That’s because reimbursements are subject to VAT, while disbursements are not.

It should be noted that if an organization is trading close to the VAT registration threshold, the wrong classification of expenses might lead to the VAT registration gateway being breached.

In order to treat a payment as a disbursement, it should meet several criteria. The following must apply:

  • You had permission from the client to pay for them.
  • The client received, used, or had the benefit of the goods/services you paid for (for them).
  • You paid the supplier on your client’s behalf (acting as the agent of your client).
  • The client knew the goods/services were from another supplier—not from you.
  • You breakdown the costs separately on an invoice
  • It was the client’s responsibility to pay for the goods/services—not yours.
  • You pass on the exact amount to the client when you invoice them.
  • The goods/services you paid for are in addition to the cost of your own.

Effective cash management starts with knowing the difference between disbursements and payments (reimbursements) and when to make them.

How to do a Cash Disbursement

To perform a cash disbursement, an employee issues a check, pays cash, or initiates an ACH or other funds transfer. That cash (or cash equivalent) payout gets recorded in a cash disbursement journal. The journal entry records:

  • Disbursement date
  • Name of the payee
  • Funds disbursement or the amount debited and credited
  • Disbursement/payment method
  • The purpose of the payment

In the cash disbursement journal, a company itemizes all the financial expenditures it makes with cash (or cash equivalents). The cash disbursement journal helps create the organization’s general leger.

Why Cash Disbursements are Important for Businesses

Cash disbursements are a vital part of cash flow tracking. If your company records more disbursals than revenues, that’s an early warning sign that your business is in financial trouble.

Disbursements also flag your different payment methods and shed light on disbursed vs undisbursed funds. This paints a clearer picture of your cash flow status,. For small businesses, operating costs often need to be kept tight. If funds aren’t monitored closely, the company may quickly become insolvent.

Types of Disbursement

There are other, more obscure uses of the word disbursement, including the controlled disbursement and the delayed disbursement (also called the remote disbursement).

Controlled Disbursement

Controlled disbursement is a type of cash flow management service that banks make available to their corporate clients. It allows them to review and reschedule disbursements on a day-to-day basis. That gives them the opportunity to maximize the interest they earn on the cash in their accounts by delaying the precise time that an amount of money is debited from the account.

Delayed Disbursement

Delayed disbursement, also called remote disbursement, is deliberately dragging out the payment process by paying with a check drawn on a bank located in a remote region. In the days when a bank could process a payment only when the original paper check was received, this could delay the debit to the payer’s account by up to five business days.

The widespread acceptance of an electronic copy of a check in lieu of the original paper check has made this tactic hard to pull off.