“Disbursement vs. Drawdown”

 

In the world of finance, “disbursement” and “drawdown” hold various meanings. They share some similarities, including that they both refer to a fund transfer from a larger account to a specific recipient. However, the terms are different things altogether.

 

Disbursement: paying out money

 

“Disbursement” basically means paying out money. The term can be used to describe an assortment of scenarios. These include money paid into the operating budget of a business, a loan amount delivered to a borrower, or a dividend payment to shareholders. Money that an intermediary pays – like a lawyer’s third-party payment on behalf of a client – can be deemed a disbursement.

 

For businesses, disbursement is part of cash flow and also functions as a record of daily expenses. If the cash flow turns out negative (i.e. the disbursements exceed revenues), it can indicate insolvency.

 

Accounting entries for disbursements normally display this information:

 

  • Date
  • Name of the payee
  • Amount debited or credited
  • Method of payment
  • The payment’s overall purpose
  • Influence on the firm’s cash balance

 

Some businesses use the “remote disbursement” cash management strategy as a means to manipulate the Federal Reserve’s check-clearing system. With proper execution, remote disbursement allows a company to obtain a small amount of extra interest on its deposit accounts.

 

Drawdown: receiving funds

 

A “drawdown” is a peak-to-trough decline. Specifically, one that occurs during a certain period for an investment, fund, or trading account. They are sometimes referred to as a “drawdown facility,” which allows the borrower to take out additional credit. This is often the case when it comes to flexible mortgage accounts. Drawdowns are vital for the measurement of historical risk regarding different investments, fund performance comparisons, or observing personal trading performance.

 

Drawdowns are often quoted as the percentage between the peak and the consecutive trough. A trading account holding $10,000 suddenly experiencing a drop in funds that comes out to $9,000 before surpassing $10,000 means that the trading account saw a 10% drawdown. This technique of recording drawdowns comes in handy because a trough cannot be measured until the occurrence of another peak. When the price or value remains below the old peak, a lower trough may transpire. This would result in an increase in the drawdown amount.

 

Bottom line

 

Drawdown generally refers to the acquisition of funds from a bank loan or a retirement account or money deposited into an individual account. Disbursements can be described as cash outflows. Purchases from investment accounts, dividend payments, and even the act of spending cash are all technically disbursements.