What it means
Money leaves a business through thousands of individual payments a year, each of which is an opportunity for something to go wrong: a duplicate payment, a payment to a fraudulent supplier, an unapproved purchase, a wrong amount, a payment before it is due, or a legitimate payment recorded against the wrong account. Disbursement control exists to prevent these, and the cash disbursement process is designed around it.
The standard cycle for a supplier payment runs: a purchase is requisitioned and approved; a purchase order is issued; goods or services are received and the receipt is recorded; the supplier's invoice arrives and is matched against the order and the receipt (three-way matching); discrepancies are resolved; the invoice is approved for payment and entered into the payables ledger; a payment run selects invoices due; the payment is authorised, usually by someone other than the person who prepared it; the payment is released; and it is recorded against the supplier account and the bank. Payroll, tax, loan and dividend disbursements follow their own cycles with the same principles: an obligation validated, an authorisation independent of preparation, and a record.
Controls concentrate at the points of risk. Supplier master data is the first: creating a new supplier or changing bank details must be independently verified, since most payment fraud consists of diverting genuine payments to a fraudster's account through a changed bank detail.
Authorisation limits are the second: payments above thresholds require additional signatories, and no one should be able to both create a payee and approve a payment to it. Duplicate detection is the third: systems check for invoices with the same number, amount and supplier.
Segregation is the fourth: the person who reconciles the bank should not make payments. Timing is the fifth: payment runs on fixed dates, with invoices paid on their due date rather than as they arrive, both for control and for cash.
The physical form matters less than it did. Cheques, once dominant, brought risks of forgery, alteration and theft in the post; electronic payments bring risks of credential theft and authorised push payment fraud, in which staff are tricked into sending money to a criminal.
Modern controls include dual approval within the banking platform, call-back verification of new bank details on a known number, and payment file controls that prevent alteration between approval and release. Disbursements are recorded in the cash disbursements journal or, in modern systems, in the payables and bank modules, and appear in the cash flow statement grouped by nature: operating payments to suppliers and employees, investing payments for assets, and financing payments to lenders and shareholders.
The timing of disbursements is the main tool of short-term cash management: a business that pays all suppliers on the due date rather than on receipt of invoice holds, on average, weeks of additional cash at no cost to its relationships.
In practice
Real-world examples.
Example
A hospital's payables team runs two payment runs a week, one for supplier invoices due and one for urgent items approved by the finance director.
Example
A construction company pays subcontractors only against certified valuations, with retention withheld, under a disbursement procedure agreed with its bank.
Example
A charity requires two trustees to approve any disbursement over $5,000 in the online banking system.
Think of it
“Cash disbursements are all the payments flowing out of your business-the outgoing money stream.
Formula
Calculation
Total Cash Disbursements (period) = Operating payments + Capital payments + Financing payments + Tax and other payments
Days Payables Outstanding = Trade payables / Purchases x 365
Cash held by paying on the due date rather than on receipt = Average daily purchases x Average days between receipt and due date
Worked example. A distribution company processes 900 supplier invoices a month totalling $2,700,000, on average terms of 30 days. Historically it has paid invoices as soon as they are approved, typically 8 days after receipt, and has run weekly payment runs. Its bank overdraft costs 8%.
Cash effect of paying on due date: average daily purchases = $2,700,000 / 30 = $90,000. Paying at 30 days instead of 8 keeps 22 days of purchases in the bank: $90,000 x 22 = $1,980,000. Interest saved at 8% = $158,400 a year. Supplier relationships are unaffected because the company is paying on the agreed terms.
Early payment discounts: 40 suppliers, accounting for $600,000 a month of purchases, offer 2% for payment within 10 days. Taking the discount costs the company 20 days of cash on $600,000 (about $400,000 tied up at a cost of $32,000 a year) but saves 2% x $600,000 x 12 = $144,000 a year. The discounts are worth taking; the rest are paid on the due date.
Control review findings in the same year:
- 14 duplicate payments totalling $61,000, of which $48,000 was recovered; the system's duplicate check was matching on invoice number only and missed re-keyed invoices with a suffix
- One fraudulent bank-detail change, caught by a call-back to the supplier on the number in the master file, which would have diverted a $94,000 payment
- 62 payments made without a purchase order, totalling $210,000, mostly legitimate but unapproved in advance
Actions: the duplicate check is extended to match on supplier, amount and date within 30 days; the call-back control is written into the procedure; and a rule that no invoice over $500 is paid without a purchase order is enforced from the next month, with the exceptions report reviewed by the finance manager.
Combined effect: about $158,000 of interest saved, $144,000 of discounts captured, and $13,000 of unrecovered duplicates and a $94,000 near-miss prevented, against the cost of one additional payables clerk at $42,000.Case study
Seen in the real world.
A manufacturing company received an email, apparently from a long-standing supplier's finance manager, advising that the supplier had changed banks and giving new account details. The payables clerk updated the master file, and the next payment run sent $187,000 to the new account. The genuine supplier chased payment two weeks later.
The email had come from a domain one letter different from the supplier's, the bank account was in another country, and the money was gone. The company's insurance did not cover it because the payment had been authorised by the company's own staff. The finance director's review found that the clerk had followed the procedure as written, which required only that the request be in writing on supplier letterhead.
The new procedure required every bank-detail change to be verified by telephone to a contact and number already held on the master file, not to any number in the request; a second person to approve the change in the system; a report of all master file changes to the finance director weekly; and the first payment after any change to be limited to $5,000 until the supplier confirmed receipt. The company also joined its bank's payee-confirmation service.
In the following two years the finance director's weekly report showed six further attempted diversions, all stopped by the call-back. His note to the board observed that the fraud had required no access to the company's systems, only a plausible email and a procedure that trusted paper.
Watch out
Common mistakes.
- Allowing one person to create or amend supplier bank details and also approve payments. This is the single most exploited gap in disbursement control.
- Paying invoices on receipt rather than on the due date, which gives away weeks of cash for nothing.
- Relying on duplicate detection by invoice number alone, which misses re-keyed and resubmitted invoices.
Questions
People also ask.
What is the difference between a disbursement and an expense?
A disbursement is a payment of cash. An expense is a cost recognised in the income statement. They often coincide but not always: buying an asset is a disbursement but not an expense; depreciation is an expense but not a disbursement.
How should a business verify a change in supplier bank details?
By calling the supplier on a number already held on file, never on a number in the request, and by having a second person approve the change before any payment.
How often should payment runs be made?
Weekly or fortnightly for most businesses, on fixed dates, so that invoices are paid on or just before their due date and urgent payments are the exception that needs a signature.
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