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Disbursements
24 May 2022
Category Business Tips

It’s essential for small businesses to have a solid understanding of their cash flow. Money is often tight, and must be carefully managed into a steady budget. Failure to do so can result in unstable finances, causing wasteful spending or restricting growth opportunities. Moreover, mismanaged payment processes can lead to fines, penalties, and even legal action. All of which can be catastrophic to businesses, both large and small. Needless to say, perfecting the handling of your cash flow should be a high priority.

Understanding disbursements is essential for creating and maintaining a stable cash flow. In this article, we will discuss why this is the case, what disbursements are, and provide examples of how disbursements can be used in practice.

What are disbursements?

Disbursements are cash payments from a company to a third party. Disbursements cover a wide range of expenses, including payroll, stock purchases, and shareholder dividends, to name only a few. These payments act as a measure of a company’s outflow and, therefore, financial health. If a company’s outflow is more than its inflow, it means the company is unprofitable, and could be on track for insolvency.

But disbursements don’t only apply to businesses. Private individuals can also make disbursements, covering loan repayments or investments. In some cases, disbursements can also be made by special funds, making disbursements quite far-reaching. As such, having a solid grasp on disbursements is crucial for a healthy cash flow, both for businesses, and for private individuals.

The difference between disbursements and reimbursements

Disbursements are often conflated with reimbursements, though they are two distinct concepts. As we have mentioned, disbursements are made by a company to cover certain costs. Reimbursements, however, are paid to a company by one of its clients. They are given as refunds for disbursements made by the company in question on behalf of the client.

This distinction is essential to know, mainly for one reason alone – disbursements are not subject to VAT, while reimbursements are. If you mistake the two and fail to classify your expenses correctly, you could find yourself in breach of VAT regulations. If in doubt, you should consider a few main points:

  • Your client must permit you to purchase goods or services on their behalf, and they must receive whatever is bought.
  • Your client must know that a third party provides the goods or services rather than your company.
  • You make the payment on behalf of your client, separating that expense from your other costs.
  • You pass the cost onto your client to be paid at a later date.

If any of your payments meet the above criteria, you can safely consider them to be disbursements. Taking care to know the difference will help keep your administration organised and efficient, in addition to keeping your company within the law.

Types of disbursements

Though cash disbursements are one of the most common types, there are several other methods of making a disbursement. Below are a selection of the most used types:

Cash disbursements

Cash disbursements are the most prevalent type, as they are often the most simple to make. Also known as cash payments, cash disbursements involve making certain payments using cash, electronic transfers, or other such payment methods.

Cash disbursements can be used to cover your company’s operating costs, make loan and interest repayments, and provide refunds to customers. In the latter case, this will count as a reduction in sales.

Cash disbursements should be carefully recorded, detailing dates, amounts paid, means of payment, and the reason for the disbursement. Using an accounts payable system can significantly help streamline this process, keeping your records well organised and offering the option to automate the process. If you intend to make regular cash disbursements, you could instead ask your bank to handle the process. With a series of dates and details, the bank will make the payments you specified on their appropriate dates on your behalf, taking the process off your hands entirely.

Disbursement vouchers

Some companies prefer to defer their payments until a later date, while keeping track of the amount owed by using a document. This document is called a disbursement voucher, which details the amount owed and, once submitted, allows a cheque to be prepared to repay the debt.

Disbursement vouchers can be made out to a number of recipients, covering the cost of purchased goods or services. The money detailed in the disbursement voucher will be taken from the company account and deposited in the recipient’s account. The disbursement voucher will then be kept with other financial records.

Disbursement cheques

Disbursement cheques are written by companies to make a payment. Though individuals can use other forms of disbursement, disbursement cheques are solely for business use. Disbursement cheques can be used to make a wide range of payments, and when originating from a business account, it is usually the correct classification.

Disbursement cheques can be used to cover payroll and employee salaries, payments for goods or services rendered, shareholder dividends, and profit distributions.

Keeping track of your cash flow

As disbursements measure your company’s outflow, you must have accurate and well-organised information. Keeping a disbursement journal is a surefire way to organise your disbursements, allowing you to stay apprised of your company’s cash flow at a glance.

A disbursement journal is most often used when making cash disbursements, including all the information we outlined previously. This information is separated into columns, creating detailed records of exactly what was paid to whom and for what reason. Other information, such as discounts or reference numbers, can be included for additional detail. In the end, you will have a set of accurate records, displaying your company’s out flow, and ensuring your company is correctly classifying its expenses.

What disbursements might an insolvency practitioner make?

An insolvency practitioner will make disbursements during the liquidation process. They are usually over and above the liquidator’s fee for company liquidation, taking the shape of several smaller costs in addition to the main liquidation fee. The total cost of these disbursements will depend on the complexity of a case however for straight forward liquidations such as an MVL, the cost can be predicted in advance.

One of the main disbursements made during an MVL is the publication of notices. During the MVL process, the appointed insolvency practitioner must announce the liquidation of a company to the public. This takes the form of three notices posted in the Gazette. The first notice must be posted on the appointment of the insolvency practitioner. The second on the completion of the MVL, and the third for claims. For companies based in Scotland, another notice will be needed. The purpose of these notices is to notify the creditors of a company, such that they may make an objection to recover what the company owes. These notices generally cost £89, though the price can differ depending on your chosen agent.

Clarke Bell can help

If your company’s disbursements show a continuous lack of profitability, it could be wise to consider reorganising, or closing down entirely. Clarke Bell has over 27 years of experience helping companies in difficult financial situations find the best way to close in the most efficient way possible. If your company is struggling, we could do the very same for you. Call our team of experts today to find out how Clarke Bell can help you.

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If you are worried about your business or just want a (free) no obligation chat, contact Clarke Bell on 0161 907 4044 or [email protected] today. Our Licensed Insolvency Practitioners will provide you with the best professional advice for your situation.

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