What is a Disbursement?

Understanding Disbursements

In finance and accounting, a disbursement is a payout or payment of funds, usually made by a business to cover expenses, purchase goods or services, or settle debts. These payments are documented in the company’s financial records as they affect cash flow and are essential to managing liquidity. Disbursements are crucial to financial management and operational efficiency because they ensure that obligations are met and relationships with suppliers, employees, and service providers are maintained.

Characteristics of disbursements

1. Transaction type. Disbursements are often tied to recurring financial obligations, such as payroll, utility bills, or supplier invoices. They can also be one-time payments, like the settlement of a legal claim or the loan disbursement.
2. Payment method. These payments can be made in cash, checks, electronic funds transfer (EFT), credit cards, or digital wallets. The chosen method depends on the preference of the payer and the payee and the nature of the transaction.
3. Impact on cash flow. Disbursements reduce the available cash or liquid assets of an organization or individual. For businesses, monitoring disbursements is critical to ensure that they are not exceeding their budget or running into liquidity issues.
4. Record-keeping. Each disbursement must be accurately recorded in financial statements. This includes not only the amount but also the purpose, recipient, and date of payment. Proper documentation helps track expenses and the budget, as well as prepare for audits.
5. Internal controls. Businesses often have internal controls to ensure that disbursements are authorized and legitimate. These controls may include approvals from certain departments, receipt verification, and audits of financial records.

Types of disbursements

• Operating disbursements: These are payments related to the day-to-day operations of a business, such as rent, payroll, utilities, and inventory purchases.
• Capital disbursements: These payments are for long-term investments, such as purchasing equipment, real estate, or machinery.
• Loan disbursements: This refers to the payment of borrowed funds to the borrower by the lender, often in the context of personal loans, business loans, or mortgages.
• Legal disbursements: These are funds paid out in legal cases, such as settlements or court-ordered payments.

Examples of Disbursements

Disbursements occur across various sectors and industries and involve different types of transactions. Let’s go over some of the most common examples of disbursements in real-world scenarios:

1. Employee payroll

Employee payroll is one of the most common forms of disbursement in any business. Businesses need to compensate their employees for the work they do, typically on a weekly, bi-weekly, or monthly basis. Payroll disbursements include not just the basic salary but also any bonuses, benefits, and allowances that the employees are entitled to. These payments are often made through direct deposit into employees’ bank accounts.

Example: A company disburses $150,000 in monthly payroll for 100 employees, covering their wages, benefits, and tax withholdings.

2. Supplier payments

Businesses must make regular payments to their suppliers for goods and services they procure. These payments are essential for maintaining a steady supply chain and ensuring the business can operate smoothly. Supplier disbursements can include payments for raw materials, office supplies, and outsourced services.

Example: A restaurant makes monthly disbursements to food suppliers and beverage companies to replenish its stock of ingredients and drinks.

3. Loan disbursements

When a borrower takes out a loan, the lender disburses the loan amount to the borrower either in a lump sum or installments. Loan disbursements can be used for various purposes, such as funding a business venture, purchasing a home, or consolidating debt.

Example: A bank disburses a $500,000 mortgage to a borrower to facilitate the purchase of a new home. The borrower repays the loan with interest over a set period.

4. Legal settlements

In legal cases, disbursements are often made as part of settlements, where one party agrees to pay a certain sum to resolve a dispute or lawsuit. Legal disbursements can also include payments for legal fees, court costs, and damages awarded by the court.

Example: A company agrees to pay $2 million to settle a lawsuit with a former employee over wrongful termination claims.

5. Tax payments

Businesses and individuals alike must make regular tax payments to the government. These tax disbursements can include income tax, property tax, sales tax, and other obligations. Timely payment of taxes is important to avoid penalties and interest charges.

Example: A small business disburses $30,000 in quarterly tax payments to cover federal, state, and local taxes.

6. Government disbursements

Governments often make disbursements for social welfare programs, such as unemployment benefits, pensions, and stimulus payments. These disbursements support individuals who qualify for government assistance based on various criteria.

Example: During an economic downturn, the government disburses stimulus checks to citizens to help support the economy and provide financial relief.

7. Capital expenditure payments

When a business invests in long-term assets, such as machinery, buildings, or technology, these expenditures are known as capital disbursements. These payments are made to acquire assets that are expected to generate value over time.

Example: A manufacturing company disburses $1 million to purchase new machinery for its production facility, with the expectation that this investment will improve efficiency and output.

Summary

• A disbursement is the payment or distribution of funds, typically made by a business or individual, to cover expenses, pay suppliers, or settle obligations.
• Disbursements can include operating expenses (e.g., payroll, supplier payments), capital expenses, loan disbursements, and legal settlements.
• Common examples of disbursements include employee payroll, supplier payments, loan disbursements, tax payments, and legal settlements.