Every business needs a helping hand every once in a while. Whatever the size or nature of your business, your target market, or the products and services you offer, you can’t handle everything by yourself. Aside from relying on outsourcing for certain key functions, your business may also rely on professional service providers such as lawyers, conveyancers, or consultants. Whenever you acquire a new business premises, expand into a new territory, or need to defend your business against defamatory claims, you need to engage the services of these professionals.
In doing so, you also need to understand the costs incurred so that you can accurately account for the spending that they require and make accurate cash flow predictions. Not all of the costs will be covered by a service provider’s hourly rates. You’ll need to account for additional expenses like disbursements.
What are disbursements?
Disbursements are the costs incurred by consultants, lawyers, and other professional service providers that they pass on to clients. They are charged above and beyond their hourly rates. Because there are no set costs for legal, conveyancing and consultancy services, these can vary enormously. However, most states have a legislative limit on how much companies can charge for services like conveyancing.
It is essential for both professional service providers and the companies that use them to account for these, as they will have lasting implications for both parties’ cash flow for the duration of their engagement. Most contracts contain a disbursements schedule to ensure that cash flow for both parties is harmonious.
Disbursements vs recharges
It’s important for professional service providers to be aware that disbursements are not the same as rechargeable expenses / recharges. A disbursement is classed as a purchase you facilitate that your client then receives, uses or benefits from, rather than a purchase that facilitates the service you provide. As such, things like travel expenses or accommodation cannot be considered disbursements.
In order for an expense to be classified as a disbursement, the following conditions need to be met:
You made the purchase with the client’s permission
The client was aware that you acted on their behalf
Your client either benefited from or directly received the goods or services
It is the client’s responsibility to make the payment for the purchase
The client understands that the goods or services come from an external supplier and not you
The exact amount of the purchase is added to your invoice, and clearly outlined
Why it’s important to understand disbursements
Disbursements have a range of financial management implications for professional service providers and the companies that use them.
If you provide professional services, it’s important to get the balance right when determining your hourly rates. Yes, you can count on getting your disbursements back from your clients. But unless you have an hourly rate that truly reflects your worth, you could be left with cash flow complications. Conversely, if your hourly rates are too high, you could scare away small businesses.
Likewise, if you engage professional service providers over a period of time, you need to factor in their disbursements along with their hourly rates when making cash flow projections. Allocating a figure based on their hourly rate alone may compromise your liquidity later.
Although expenses need to be carefully considered, businesses should also be wary of engaging a professional service provider solely on the basis of cost.
We can help
If you’re interested in finding out more about disbursements, professional service providers, or any other aspect of your small business finances, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.