What Is a Controlled Disbursement?

Controlled disbursement is a technique commonly employed in corporate cash management that helps corporations monitor and structure their payments while benefiting as much as possible from earned interest. Controlled disbursement is used to regulate the flow of checks through the banking system on a daily basis, usually by mandating once-daily distributions of checks (usually early in the day.) This is done in order to meet certain investment or fund management objectives.

Controlled disbursement is generally employed to maximize an institution's available cash for investment or debt payments. This allows for excess funds to be invested in the money market for as long as possible. This technique is the opposite approach to delayed disbursement or the Federal Reserve float.

Controlled Disbursement Explained

Controlled disbursement is a type of cash management service that is only available to companies. The name comes from its function: it allows a bank's corporate clients to see their expenditure, or disbursement, on a daily basis, which is a controlled period of time.

Controlled disbursement enables corporations to review and consider pending disbursements that are in their company bank accounts each day. This, in turn, enables the companies to maximize the cash flow for investments and debt payments. It also gives them the ability to make choices about payments and funding based on which assets have the highest potential for earning interest. Higher interest-earning assets can be left in place for a longer period of time to continue generating profits, while lower interest-earning assets can be used for immediate or short-term payment needs.

Corporations tend to prefer controlled disbursement because of the advantages it provides in terms of interest earned. There are two ways that it benefits interest earned:

  1. First of all, to maximize the potential for earned interest, corporations will typically stash their assets into high interest earning accounts until they are needed at a later time for the disbursement of payments. This technique helps companies earn a high amount of interest in their accounts due to the assets kept in them.
  2. The second technique for earning interest from controlled disbursement involved benefiting 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.

Key Takeaways

  • Controlled disbursement is a type of cash management service that is only available to companies.
  • it allows a bank's corporate clients to see their expenditure, or disbursement, on a daily basis, which is a controlled period of time.
  • Controlled disbursement is used to regulate the flow of checks through the banking system on a daily basis, usually by mandating once-daily distributions of checks.

Example of a Controlled Disbursement

For example, if a company writes a check to pay for goods and services, it will take a few days to be cleared. This delay can be beneficial for the account holder, as interest is earned while the funds are sitting in an account, waiting to be transferred. An individual may not get much from this as they may only have a small amount in the account to earn interest. But for a multi-national corporation, the advantage is huge, with substantial amounts of money accumulating significant interest, even for a day or two.