How to Manage Cash Disbursements

How to Manage Cash Disbursements
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  • 0:03 Disbursement
  • 0:43 Float
  • 2:19 Types of Disbursement Accounts
  • 4:27 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Cash disbursements are a major part of any business, but there are ways that businesses can manage disbursements to make money. In this lesson, we'll examine how to manage cash disbursements for maximum value.

Disbursement

Hector owns a business. As a business owner, Hector has to pay bills. He pays rent on his store and has to pay the companies from whom he buys the products that he sells.

A business disbursement is simply the business spending money. Whether it's writing a check or electronically transferring funds, a disbursement is when a business pays for something, like Hector paying rent or his suppliers. How a business disburses its funds can have a large impact on its bottom line.

To help Hector understand how disbursement works, and how he can manage his business's cash, let's look at float and types of disbursement accounts that let him take advantage of float.

Float

Every time Hector writes a check from his business, he subtracts it from the bank balance in his books. But for a couple of days, that money is still in the bank. This is an example of float, which is the difference in the cash on the books of a business and the cash the business actually has in the bank. As legendary investor Warren Buffet once said, 'Float is money we hold but don't own.'

Ideally, there will be a long time between when a check is written by a business and when the check clears and the money actually leaves the business's account. That's because, with a longer float time, a business can invest the money and make even more money while waiting for the check to clear.

For example, if Hector pays $5,000 rent for his store, he might write a check on the first of the month and send it out. If the landlord doesn't cash that check for a few days, and it doesn't clear Hector's bank until the tenth of the month, that's ten days that Hector could still be making money with that $5,000. He could have it in an interest-bearing savings account or in the stock or bond market. If, on the other hand, the disbursement float is only three days (that is, his check clears on the third day of the month), that's less time for Hector to make money on that $5,000.

It might not be completely ethical to lengthen disbursement float, but there are ways to do it. One common way is to write paper checks and mail them out, instead of transferring funds electronically. By writing a check and mailing it out, Hector can buy himself a couple of extra days as the check travels through the mail system, is taken to the bank for deposit, and is then processed by the bank.

Types of Disbursement Accounts

The idea that Hector can make money on disbursement float is appealing, but how can he do it? If the money is just sitting in his business checking account, it won't make any money. If he has the money invested in bonds, for example, then the money won't be there to cover it when the landlord goes to deposit his check. What can Hector do? There are several types of disbursement accounts that Hector can use to help him take advantage of float. Two common and related ones are zero-balance accounts and controlled disbursement accounts.

A zero-balance account is just what it sounds like: an account that always has a balance of zero at the end of the day. How does it work? At the beginning of the day, funds are electronically transferred into the account, based on the disbursements that the company thinks will clear that day. At the end of the day, if there is any money left over, the company then transfers the remaining balance out and invests it elsewhere.

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