Cash disbursement is a critical financial process that every business must understand and manage effectively. In simple terms, cash disbursement refers to the outflow of money from a company’s accounts to pay for various expenses, such as supplier invoices, employee salaries, rent, utilities, taxes, and more. Efficient cash disbursement management ensures that a business meets its financial obligations on time while maintaining adequate cash flow for operational needs.
This article explores cash disbursements, covering its definition, process, types, and best practices. By the end, you’ll understand what is cash disbursement and how to optimise it for better financial management and business success.
Table of Contents
What Is Cash Disbursement?
Cash disbursement is the process of paying out money from a business’s bank account to settle various financial obligations. These payments can be made through various methods, such as cheques, electronic funds transfers (EFT), wire transfers, or cash. The primary goal of cash disbursement is to ensure that a company meets its financial commitments while maintaining accurate records of all outgoing transactions.
Examples of Cash Disbursements
Here are a few common examples of cash disbursements in a business setting:
1. Paying Suppliers for Raw Materials
When a company purchases raw materials or inventory from suppliers on credit, the payment made to settle the invoice is a cash disbursement.
2. Paying Employee Salaries
Regular payments made to employees for their salaries, wages, bonuses, and other compensation are considered cash disbursements.
3. Buying Essential Business Assets
When a business acquires fixed assets such as equipment, machinery, or vehicles, the payment made for the purchase is a cash disbursement.
What Are Drawdowns?
In the context of cash disbursement, drawdowns refer to the withdrawal of funds from a credit facility, such as a term loan or line of credit. When a business needs additional cash for operations or investments, it can request a drawdown from the lender. The lender then transfers the requested funds to the company’s bank account, which is recorded as a cash disbursement.
What Is a Cash Disbursement Journal?
A cash disbursement journal is an accounting tool used to record all outgoing cash transactions. This journal helps businesses track and categorise their expenses, making it easier to generate financial statements and monitor cash flow. Typical information recorded in a cash disbursement journal includes:
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Date of the transaction
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Payee name
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Payment method (cheque number, EFT reference, etc.)
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Amount paid
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Expense category (e.g., raw materials, salaries, rent)
8 Types of Cash Disbursement
Businesses can choose from various payment methods when disbursing cash. Here are eight common types of cash disbursement:
1. Cheques
Cheques are a traditional payment method that many businesses still use. They provide a paper trail and can be easily reconciled with bank statements.
2. Electronic Funds Transfer (EFT)
EFT is a fast and secure way to transfer funds electronically between bank accounts. This method is becoming increasingly popular due to its efficiency and cost-effectiveness.
3. Wire Transfers
Wire transfers are typically used for large, urgent, or international payments. They offer immediate funds availability but often come with higher transaction fees.
4. Credit and Debit Cards
Many businesses use corporate credit or debit cards for small purchases, travel expenses, and online transactions. These cards offer convenience and can help streamline expense tracking.
5. Automated Clearing House (ACH) Payments
ACH payments are electronic transfers processed through the Automated Clearing House network. They are commonly used for recurring payments, such as payroll or supplier invoices.
6. Cash Payments
While less common, some businesses still use cash for small purchases or petty cash expenses. Proper documentation and reconciliation are essential when dealing with cash payments.
7. Prepaid Cards
Prepaid cards can be loaded with a specific amount of funds and used for employee expenses or Cash on Delivery payments. They offer better control and visibility over spending compared to cash.
8. Money Orders
Money orders are prepaid certificates that function similarly to cheques. They are often used when a payee does not accept cheques or when the payer wants to maintain anonymity.
Why Are Cash Disbursements Important?
Effective cash disbursement management is crucial for several reasons:
1. Keeping Accurate Financial Records
By properly recording and categorising cash disbursements, businesses can maintain accurate financial records, which are essential for tax purposes and decision-making.
2. Meeting Compliance and Reporting Rules
Accurate cash disbursement records help businesses comply with various financial regulations and reporting requirements, such as tax laws and accounting standards.
3. Helping in Financial Planning
Understanding cash disbursement patterns allows businesses to create more accurate cash flow forecasts, which inform budgeting and financial planning decisions.
4. Maintaining Good Vendor and Creditor Relations
Timely and accurate cash disbursements help businesses maintain positive relationships with suppliers, lenders, and other creditors by demonstrating financial responsibility and reliability.
How Cash Disbursement Works?
The cash disbursement process typically involves the following steps:
Step 1: Getting Approval
An employee or department submits a purchase request or invoice for approval. The appropriate manager or authority reviews and approves the request.
Step 2: Processing the Invoice or Payment Request
The accounting department receives the approved invoice or payment request and enters it into the accounting system.
Step 3: Keeping Records
The transaction is recorded in the cash disbursement journal, along with relevant details such as payee, amount, and expense category.
Step 4: Choosing How to Pay
The accounting department selects the appropriate payment method based on the payee’s preferences, payment amount, and urgency.
Step 5: Final Approval
A final review and approval of the payment are conducted by authorised personnel, such as the CFO or controller.
Step 6: Making the Payment
The payment is executed using the chosen method, such as issuing a cheque or initiating an electronic transfer.
Step 7: Recording the Transaction
The payment is recorded in the company’s bank account and reconciled with the cash disbursement journal.
Step 8: Checking for Errors
The accounting department reviews the transaction for any discrepancies or errors and makes necessary adjustments.
Step 9: Sending Payment Confirmation
A payment confirmation or receipt is sent to the payee for their records and to ensure transparency.
Ways to Automate Cash Disbursement
To streamline the cash disbursement process and reduce manual errors, businesses can leverage various automation tools:
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Accounts payable automation software
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Electronic invoicing and approval workflows
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Automated payment scheduling and execution
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Integration with accounting software for seamless record-keeping
Automation not only saves time and reduces costs but also enhances security and fraud prevention measures.
Improve Cash Disbursement with Technology
In addition to automation, businesses can optimise their cash disbursement process by adopting modern financial technology solutions:
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Cloud-based accounting software for real-time visibility and collaboration
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Mobile payment apps for on-the-go transactions
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Virtual cards for secure online purchases
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Blockchain technology for transparent and immutable payment records
By embracing digital tools, businesses can make their cash disbursement process more efficient, secure, and adaptable to the evolving needs of the modern economy.
Conclusion
Cash disbursement is crucial for managing business expenses efficiently, ensuring smooth operations and financial stability. Tracking payments helps maintain accurate records, avoid discrepancies, and support financial planning. Automating processes reduces errors, saves time, and improves efficiency, while ensuring security prevents fraud, safeguards funds, and enhances compliance. By implementing effective cash disbursement practices, businesses can strengthen financial control, optimise cash flow, and support sustainable growth, ultimately contributing to long-term success and stability.
Frequently Asked Questions (FAQs)
1. What is a disbursement check?
A disbursement check is a physical cheque issued by a business to pay for goods, services, or other financial obligations. It serves as a record of the payment transaction and can be reconciled with bank statements.
2. What is a cash disbursement journal a summary of?
A cash disbursement journal is a summary of all outgoing cash transactions made by a business. It includes details such as the date, payee, payment method, amount, and expense category for each transaction.
3. What is the difference between cash disbursement and payment?
Cash disbursement specifically refers to the outflow of cash from a company’s bank account, while payment is a broader term that includes various methods of settling obligations, such as cash, checks, or electronic transfers.
4. Is a disbursement the same as a refund?
No, a disbursement is an outflow of cash to pay for expenses or obligations, while a refund is the return of funds to a customer or client, typically due to overpayment or product return.
5. Are disbursement checks taxable?
The taxability of disbursement checks depends on the nature of the expense. Some disbursements, such as employee salaries, may be subject to income tax withholding, while others, like vendor payments, are generally not taxable.
6. How do businesses track disbursements?
Businesses track disbursements through cash disbursement journals, which record all outgoing cash payments. They also reconcile bank statements with their internal records to ensure accuracy and identify any discrepancies.
7. What happens if a disbursement check bounces?
If a disbursement check bounces due to insufficient funds, it can lead to penalties, fees, and damage to the business’s reputation. It’s crucial to maintain adequate cash balances and reconcile accounts regularly to avoid such situations.
