What does the term commitment refer to in the context of funding?

In the context of funding, the term commitment refers to the reservation of funds based on procurement requests. This involves setting aside a portion of budgeted funds to ensure that money will be available for anticipated future expenses related to a specific procurement action. By making a commitment, an entity can plan for future outlays while controlling cash flow, ensuring that funds are earmarked for designated purposes without actually transferring the funds at that moment.

This process is essential because it helps organizations manage their finances effectively, allowing them to gauge how much is being set aside for upcoming obligations, which can include contracts or other expenditures. Commitment is a crucial step before actual disbursement occurs or before an obligation is recognized, as it ensures that the funds are allocated in anticipation of future payments that will need to be made once contract actions or services are performed.