You are not necessarily making a payment when money leaves your business bank account. The reason why you are paying out money and the recipient of the payment determines whether you are making a general payment or a disbursement.
For accounting purposes and to have a more precise picture of how money moves out of your business, it's crucial that you understand the difference between a disbursement and a payment.
The two terms are related but only sometimes refer to the same thing, so they need clarification. This article separates payments from disbursements with definitions and examples.
Let's dive right in.
A disbursement is the act of distributing money from a specialised fund. The payer should have gathered for what they are now paying it out for, meaning they don't draw the money from a general purpose account, nor is it used for any purpose.
So, a disbursement is the financial action of paying out money to its intended beneficiaries. It is the release of funds collected or gathered for a specific purpose.
Disbursement amounts are typically predetermined, meaning you have a list of recipients and the money they will receive. Disbursements can be made in cash or paid directly into beneficiaries' bank accounts.
When you disburse money, you transfer it to its beneficiary. The money has already been allocated to the beneficiary but has yet to be in their possession. So, disbursing means handing over so the beneficiary can take possession.
There are many instances where an organisation will make disbursements. Here are three:
A non-governmental organisation sources money from overseas donors to distribute to food-insecure rural villagers. It then distributes the money into the mobile money wallets of pre-selected beneficiaries.
From this example, disbursements can be distributions of anything of value. In this case, the drought relief can also be in food hampers or grain.
A bank sets up a loan scheme for SMEs struggling for working capital. Qualifying small businesses apply for the loans. After reviewing the loan applications, the bank disburses the loans to the successful applicants.
We can also use the loan example to highlight a type of disbursement: controlled disbursements. These are when the bank chooses not to distribute the loan money in one payment but in several timed tranches. The bank may do this to prevent misuse of the loan by releasing only the money as and when needed.
Salaries are a dedicated business expense. So, after running payroll, you will draw the total salaries amount from the business's finances. You collectively account for this as the payroll fund.
The money from the payroll fund will need to be explicitly released to pay workers' salaries. The action of paying salaries is, therefore, technically called salary disbursement.
Using the example of a salary disbursement, we can also describe disbursements as money you distribute on behalf of another.
For example, Intasend can disburse salaries or loans on behalf of its clients. As the customer, you submit a list of people we should disburse money to through your dashboard or our payments transfer API.
A reimbursement is a repayment of money a person or business has lost or spent on something. On the other hand, a disbursement is the distribution of funds for a specific purpose.
An example of a reimbursement is when you repay an employee for a business expense they covered from their pocket. In that regard, disbursements and reimbursements mean opposite things, i.e. paying out vs paying back.
A payment is when you give money or something of value in exchange for or as compensation for a good supplied or service provided. It is when you spend money to cover a cost.
Running a business is an exercise in paying and getting paid, with the expectation that you will be paid more than you pay out. You get paid by your customers for the products or services you supply them. At the same time, there are materials and services you have to buy (pay for) to produce the products or services you sell.
These days, payments can be made in any of several ways. You can pay in hard cash, paper cheques, through direct bank deposit, mobile money wallet, debit or credit card, digital wallet, Bitcoin, and other payment methods.
Intasend's business customers can make payments through direct bank deposits and all the leading electronic wallets, including M-Pesa, Airtel Money, PesaLink, Equitel, and Orange Money.
Every time you purchase something for your business, you make a business payment. So, every expense marks a payment event.
Everyday business expenses for which you make payments are:
Even when you receive goods and services on credit, you will eventually have to settle the debt with a payment.
Disbursements and payments differ in that the former transfers or distributes money from a fund to recipients for a predefined purpose, while payment is when money is passed from one party to another in exchange for something.
A payment compensates someone for a product or service they have supplied. On the other hand, a disbursement distributes money from a fund it's held in to the beneficiaries it's intended for.
We can deduce then that payments and disbursements perform the same task of moving money from one party to another, albeit to and for different people and purposes. Disbursements distribute or transfer money to a beneficiary, while payments compensate a seller or provider for what they have supplied.
Another way to differentiate disbursements and payments is by who performs the action. For example, with a loan, the bank does the disbursement, meaning it pays out loans to borrowers. The borrower will then make payments to repay the loan.
In both instances, the subject is paying out. This shows that though they are important differences, payments and disbursements achieve the same thing: moving money from one party to another.
The typical business will perform countless payments to suppliers and vendors throughout its existence. Some of these are disbursements to employees, shareholders, and government agencies.
You disburse salaries to employees and taxes to the Kenya Revenue Authority (KRA) every month. That's a lot of money moving out of the business, for which you need robust systems to track and reconcile.
While salaries, for example, are usually disbursed once every month, payments to suppliers and service providers are more frequent. Unless you automate them, they will take a toll on your cash flow and administrative resources.
Intasend simplifies business payments and disbursements through our multiple tools. Our platform lets you pay your suppliers directly using the balance in your account. Not just that:
Through your Intasend account, you can also schedule your business payments to pay out at predefined dates, which allows you to optimise your funds and maintain a healthy cash flow.
If you are disbursing salaries or loans, or sending money to multiple recipients, our platform lets you pay up to 5,000 recipients with a single request, saving time and money. The transfers are fast, instant, and secure.
Sign up for an Intasend business account today and streamline your business payments and disbursements. We support direct bank transfers and mobile payments to the leading networks.