Definition of controlled disbursement
What is a controlled disbursement?
Controlled disbursement is a common cash management technique that helps businesses track and structure payments while benefiting as much as possible from interest earned. Controlled disbursements are used to regulate the flow of checks through the banking system on a daily basis, typically by enforcing once daily check distributions (usually at the start of the day). This is done in order to achieve certain investment or fund management objectives.
Controlled disbursements are generally used to maximize an institution’s available liquidity for investments or debt repayments. This allows excess funds to be invested in the money market for as long as possible. This technique can be compared to a deferred disbursement, which also aims to leave money in the account as long as possible.
Key points to remember
- Controlled disbursement is a type of cash management service that is only available to businesses.
- It allows business customers of a bank to see their expenses–or disbursements–on a daily basis, which is a controlled period of time.
- Controlled disbursements are used to regulate the flow of checks through the banking system on a daily basis, typically by enforcing once-daily check distributions.
Controlled disbursement explained
Controlled disbursement is a type of cash management service that is only available to businesses. The name comes from its function: it allows companies that are clients of a bank to see their expenses, or disbursements, on a daily basis, which control period of time.
Disbursement Control allows businesses to review and account for pending disbursements that are in their business bank accounts every day. This, in turn, allows companies to maximize cash flow for investments and debt payments. It also gives them the flexibility to make choices about payments and funding based on which assets have the greatest potential to earn interest.
Higher interest earning assets can be left in place for a longer period to continue earning profits, while lower interest earning assets can be used for immediate or short term payment needs. Companies tend to prefer controlled disbursements because of the benefits they offer in terms of interest earned. There are two ways it benefits the interest earned.
First, to maximize the potential for interest earned, companies typically store their assets in high interest accounts until they are needed later for disbursement of payments. This technique allows companies to earn a high amount of interest on their accounts because of the assets kept there.
The second technique for earning interest from a controlled disbursement is to benefit from the float time of a financial payment transaction. Float time is a term referring to the period of time that exists between when a payment is first made and when the amount is cleared.
Example of controlled disbursement
For example, if a business issues a check to pay for goods and services, it will take a few days to be cleared. This delay can be advantageous for the account holder, as interest is earned while funds are placed in an account, pending transfer.
An individual may not get much out of it, as they may only have a small amount in their account to earn interest. But for a multinational corporation, the advantage is huge, with substantial sums accumulating significant interest even for a day or two.