Drawdown vs. Disbursement: An Overview
In finance, both drawdown and disbursement have multiple meanings. They are similar in that they both refer to a transfer of funds from a larger account to a specified recipient.
The term drawdown most commonly refers to the process of receiving funds from a retirement account, a bank loan, or money deposited into an individual account. Disbursements are cash outflows; dividend payments, purchases from an investment account, and even spending cash are all considered disbursements.
- Drawdown most commonly refers to the process of receiving funds from a retirement account, a bank loan, or money deposited into an individual account.
- Disbursements are cash outflows; dividend payments, purchases from an investment account, and even spending cash are all considered disbursements.
Retirement accounts typically have a specified "drawdown percentage," which represents the portion of the total account balance assumed by the retiree each year.
A drawdown will result in a peak-to-trough decline during a specific period for an investment, trading account, or fund. A drawdown is usually quoted as the percentage between the peak and the subsequent trough. For example, if a trading account has $10,000 in it, and the funds drop to $9,000 before moving back above $10,000, then the trading account witnessed a 10% drawdown.
A drawdown loan, sometimes known as a drawdown facility, allows the borrower to take out additional credit with ease. This is often seen with flexible mortgage accounts.
In investing terms, a drawdown refers to the extent of an asset's price decline from peak to trough. If the price of oil declines from $100 to $75 per barrel, its drawdown is 25%.
Drawdowns are risky for investors when considering the uptick in share price needed to offset a drawdown. For example, a 1% stock loss only needs an increase of 1.01% to recover to its previous peak. However, a drawdown of 20% requires a 25% return to reach the old peak. During the 2008–2009 Great Recession, a 50% drawdown became common and required a massive 100% increase to recover the former peak.
Money disbursements come in many forms; any payment by cash, check, voucher, or outlay is considered a disbursement. The more technical use of disbursement usually refers to financial aid or professional financial services.
Financial accountants keep a cash disbursement journal to record all of a company's expenditures. This journal helps to identify different destinations of cash outflow and potential tax write-offs. An accounting entry for a disbursement should include the date, payee name, amount debited or credited, payment method, the purpose of the payment, and its effect on the firm's overall cash balance.
Certain businesses utilize a cash management technique known as "remote disbursement" to manipulate the Federal Reserve's check-clearing system. When executed properly, remote disbursement allows a company to earn a small amount of additional interest on its deposit accounts.
Disbursements measure the money flowing out of a business and may differ from actual profit or loss. For example, a company using the accrual method of accounting reports expenses when they occur, not necessarily when they are paid, and reports income when earned, not received. Managers use the ledgers to determine how much cash is disbursed, and they track its use to determine spending ratios.