Drawdown vs. Disbursement: An Overview
The terms drawdown and disbursement have multiple meanings in the finance world, though they are different things altogether. Drawdowns usually have to do with the reception of funds from either a retirement account, bank loan, or money deposited into an individual account. Disbursements refer to either cash outflows, dividend payments, purchases from an investment account, or spending cash.
- Drawdowns and disbursement may sound similar, but they are too different actions in the financial world.
- Disbursements often refer to dividend payments or cash outflows.
- Drawdowns are often associated with retirement accounts and bank loans.
- Both terms have multiple meanings in the financial industry.
- In many ways, a drawdown is the extent of an asset's price decline between its peak and trough, two of the five stages of the economy's business cycle.
A retirement account commonly has a "drawdown percentage" that represents the part of the total account balance that a retiree has assumed each year. A drawdown usually causes a peak-to-trough decline period for an investment, trading account, or fund, and it is often quoted as the percentage between the peak and the trough that follows.
For example, if a trading account has $1,000 in it, and the funds drop to $900 before rising back to $1,000 or higher, the trading account is said to have seen a 10% drawdown.
A drawdown loan is sometimes known as a "drawdown facility," and this makes it easier for the borrower to take out additional credit—as is often the case with flexible mortgage accounts. In this sense, a drawdown is the extent of an asset's price decline between its peak and trough. For example, if the price of oil were to decline from $100 to $75 per barrel, its drawdown would be 25%.
When we look at the uptick in share price needed to offset a drawdown, drawdowns can actually be risky for investors. For example, a 1% stock loss only needs a 1.01% rise to recover to its previous peak, but a drawdown of 20% needs a 25% return to reach the old peak.
During the 2008–2009 Great Recession, 50% drawdowns became common; these had to see massive 100% increases to recover the former peaks.
Any payment by cash, voucher, check, or outlay is considered a disbursement. Technically speaking, disbursements can also refer to financial aid or professional financial services. Financial accountants keep cash disbursement journals to record all of their companies' expenditures. These journals identify different destinations of cash outflow and potential tax write-offs. Accounting entries for disbursements typically show the following:
- Payee name
- Amount debited or credited
- Payment method
- Purpose of the payment
- Effect on the firm's overall cash balance
Notably, some businesses use "remote disbursements" to navigate the Federal Reserve's check-clearing system. If they are well-executed, remote disbursements allow a company to gain additional interest in its deposit accounts. Disbursements may differ from actual profit or loss; they measure the money flowing out of a business. Companies that use the accrual method of accounting record or report expenses as they occur, but not necessarily when they are paid.
The accrual method reports income when it is earned, as well—not when it is received. In this way, managers use ledgers to see how much cash has been disbursed, tracking the use of cash to determine their companies' spending ratios.