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What is a disbursement? Understanding, examples, and best practices

What is a disbursement? Understanding, examples, and best practices

Bailey Schramm

Companies of any size need to keep a detailed accounting of cash disbursements. But, knowing how to properly time and manage disbursements can be a hurdle for small teams. 

The risks of improper disbursement management include fraudulent payments, late vendor payments, and inaccurate accounting records. 

Thus, despite how simple it might seem to make a disbursement, there are serious financial implications at play. 

Continue reading below to learn more about the meaning of disbursements, how they’re used in business and their impact on financial operations for small and medium-sized companies. 

Key takeaways

Disbursements are cash payments: They're when a company pays money from its bank account for things like salaries, rent, and supplies.

Timing disbursements is crucial: If a company pays bills at the wrong time, it can hurt their finances, causing late fees or cash flow problems.

Fraud is a risk: Companies need to be careful to prevent fraud when making payments, which could be costly and damaging.

What are disbursements?

A disbursement refers to a cash payout from a fund. It’s a general concept that can describe various types of cash outflows for both business and personal use. 

For instance, a retiree might receive a disbursement from their pension fund, or a bank can make a loan disbursement to a borrower. 

In the business world, a disbursement occurs when a company makes a payout from their cash reserves or bank account. 

It’s important to note that disbursements are not always considered expenses because they might not impact the company’s profits and losses.  

If a disbursement is made to repay a loan, this would reduce the company’s liabilities–not be recorded as an expense. 

However, a disbursement example where it’s also an expense is when they’re used to support operating activities like paying rent on a warehouse space or purchasing office supplies. 

Examples of disbursements for SMBs

To better illustrate this concept, we’ll now provide a few common disbursement examples that small and medium-sized businesses deal with:

  • Salaries and wages paid to employees
  • Loan repayments
  • Cash dividends paid to shareholders
  • Rent for office space or warehouses
  • Utility payments for electricity, gas, water, internet. Etc. 
  • Purchase of office supplies
  • Purchase of equipment or machinery
  • Employee reimbursements
  • Vendor payments for goods and services received
  • Payments to the IRS for owed taxes

As you can see, the purpose and use of disbursements can vary widely, though they’re a key aspect of any business’s financial management.  

The impact of disbursements 

Disbursements are directly related to a company’s cash flows. Thus, the timing and management of cash disbursements are critical for companies to maintain liquidity and remain financially stable.  

For example, when a company initially receives a vendor invoice with net 30 payment terms, it may not be the best financial decision to disburse the funds and close out the invoice immediately. 

Let’s say they already have a loan repayment to make this week and employee payday on Friday. 

In this instance, if they have limited cash on hand, they might want to hold off on disbursing the funds to the vendor until a week later, when they have fewer cash outflows planned and more cash inflows in the meantime. 

Main disbursement methods: pros and cons

Disbursements can be made using a few different methods–with cash or cash equivalents. Here is a breakdown of these main methods and the advantages and disadvantages of each: 

Checks

A paper check or eCheck written from a business bank account and delivered or sent to vendors, creditors, utility companies, or employees is one form of disbursement. 

Pros: 

  • Embedded security features like watermarks and holograms
  • They create a paper trail that’s easy to prove when a payment was made
  • Widely accepted payment method by both businesses and individuals

Cons: 

  • Processing times are not instant
  • Forgery risk of falsified checks or signature endorsements

Electronic payments

Companies can also make disbursements using electronic payments such as an electronic funds transfer (EFT) or an Automated Clearing House (ACH) transfer

Pros: 

  • Faster processing that checks
  • Lower fraud risk than physical checks
  • Cheaper fees than wire transfers

Cons: 

  • Processing speeds aren’t as fast as wire transfers
  • Not all disbursement recipients will accept ACH/EFT payments

Wire transfers

Another option is to send a wire transfer, which involves funds being directly transferred from one bank account to another. 

Pros: 

  • Quickest processing speeds
  • Secure and reliable
  • Can be used for international payments

Cons: 

  • Fees can be higher than other disbursement methods
  • Cannot be reversed, even if you spot a mistake or error

Common challenges associated with disbursements

Strategically managing disbursements and properly recording them in the general ledger isn’t always straightforward. 

These are some of the common challenges that SMBs can face with disbursements: 

Fraud risk

Disbursement fraud can occur in many ways, though it can be extremely costly for small businesses. The longer the company goes without detecting fraudulent disbursements, the more devastating it can be. 

In general, disbursement fraud occurs when a payment is inappropriately made to a person or business. 

The person in charge of approving or scheduling the disbursement may use company funds to pay for their bills or have a disbursement routed to a bank account they control. 

It can work in tandem with invoice fraud, where a company purposefully sends a duplicate invoice hoping to collect double payment for the same order. 

Disbursement fraud can also occur when an unrecognized company sends an invoice for goods or services never delivered, the proper approvals are not in place, and a disbursement is made. 

Late payments

Companies must find a delicate balance between strategically timing payments to ensure they have sufficient cash on hand while still meeting the due date.  

Late payments can create several issues. It can cause the paying company to incur late fees or penalties. 

Plus, it can put a strain on the organization’s relationship with its vendors or suppliers. 

Missing documentation

Small businesses that don’t have a centralized system for collecting invoices and managing payments can have a hard time keeping track of key documentation needed for efficient and accurate disbursements. 

For instance, if an invoice or purchase order gets misplaced, the team may struggle to verify the disbursement amount and finalize the payment on time. 

4 Best practices for optimizing the disbursement process

Though there are some challenges associated with disbursements, small businesses can adopt these best practices to manage them more effectively: 

  1. Establish controls

Imposing proper controls can help companies prevent disbursement fraud. 

This typically means segregating duties where possible, with separate people in charge of approving and scheduling the disbursements. 

As a result, there is less possibility of collusion between the two individuals than if there was just one person in charge of both duties. 

  1. Negotiate favorable payment terms

Companies should work with vendors and suppliers to secure favorable payment terms when negotiating procurement contracts

Doing so can provide businesses with added flexibility for timing the disbursement and avoid late fees if they need extra time to make a payment. 

Net 30 payment terms are common, though it may be possible to negotiate net 45 or net 60 terms and get some extra days to make a payment. 

  1. Use electronic payments or wire transfers

As we laid out above, electronic payments and wire transfers can be a more favorable way to make disbursements than using paper checks. 

These payment methods are generally more secure and have quicker processing speeds, even if there are some added fees associated with these transactions. 

Plus, these payments can often be scheduled or pre-programmed for a certain date, meaning there is less of an administrative burden on the accounts payable (AP) team. 

  1. Set clear policies

To combat fraud, the AP department should establish clear policies and procedures to ensure disbursements are only made for legitimate invoices. 

For example, they might require verification of invoices, purchase orders, and receipts to double-check the value of the disbursements and ensure the products or services have been delivered. 

This might also include policies for the documentation required to meet the company’s reporting requirements and internal audit standards. 

Adopt an automated AP system for easier vendor disbursements

All businesses make cash disbursements, but they don’t all manage them strategically for optimal liquidity and cash flows. 

Using an automated accounts payable system like BILL makes it easier for your AP team to verify the legitimacy of invoices with two-way matching and time vendor payments for better cash flow management. 

With BILL, you can enjoy better accuracy, automated invoice verification against purchase orders, and on-time payments without the added administrative work. 

Streamline disbursements to vendors today with BILL’s automated AP solution. 

Bailey Schramm

Bailey Schramm is a freelance writer who creates content for BILL. She graduated summa cum laude from the University of Wyoming with a B.S. in Finance. Bailey combines her expertise in finance and her 4 years of writing experience to provide clear, concise content around complex business topics.

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