What Is an Approval Matrix and How Does It Work?

As organizations grow and evolve, their purchasing processes must undergo certain upgrades to keep up. More purchase requests, complexity, and spending create a disorganized environment that needs updating. The best place to start is with your approval workflow, and making it operational starts with designing an official approval matrix. 

Beyond deploying solutions that help your team automate processes and leave behind manual tasks, designing and implementing an official approval matrix will help you streamline and accelerate purchasing approval workflows and procure-to-pay approvals for less complicated purchasing and payables processes.  

What is an Approval Matrix?

A company’s purchase approval matrix is a table that outlines who’s required to sign off on a business purchase according to company policies, and provides the business rules for routing the approval tasks for those purchases. The various stages of your team’s approval processes, including which approvers or stakeholders are required to sign off on specific behaviors within those stages, make up the approval matrix. 

Not every company has one in place, but they are very beneficial to complex processes, especially as organizations quickly grow. Your purchase approval matrix will be defined according to company policies already in place, as well as to the company culture, structure, and stakeholders. Designing an approval matrix will provide your team with an official approval policy and a structured roadmap to control costs and eliminate mess. 

Examples of Approval Matrices

Examples of different types of approval matrices that apply to purchases include:

• Supplier or vendor contract approval
• Inventory purchasing
• Invoice payment approval matrix
• Project approvals
• Major capital expenditures
• Maverick spend
• Employee expense reports

Supplier or Vendor Contract Approval

In procurement, some items require contracts with suppliers in addition to purchase order approval. Depending on the contract amount, different functional approval levels may be required. The contract approval matrix may also include the legal department and the CFO. 

Inventory Purchasing

Routine purchases of inventory require authorization through an approval matrix for purchase orders. For manufacturers, approved bills of material (BOMs) contain inventory items required for manufacturing. The ERP system monitors stock levels and replenishes inventory when goods are needed based on material requirements planning (MRP), with plan approval. 

Invoice Payment Approval Matrix

The invoice approval workflow matrix is part of the procure-to-pay process. After supplier validation, invoice verification, and matching, invoices are routed to designated approvers for payment approval, following company rules for a payment approval matrix. 

Project Approvals

Projects require multi-functional department approval. Large projects may require CEO approval. 

Major Capital Expenditures

Major capital expenditures (CapEx) require finance or accounting department analysis and justification based on net cash flow or IRR, considering the time value of money. These decisions require approval by the executive management team, the CEO, and the Board of Directors. 

Maverick Spend

Maverick spend consists of expenditures for routine, small amounts not requiring a purchase order. The procurement department doesn’t need involvement in these purchases because the cost of the purchase order process is too high in relation to the expenditure amount. These types of items may also be referred to as tail spend. 

For maverick spend, employees can use pre-approved suppliers. Some employees may be issued corporate spending cards through manager approval. These spending cards track employee expenditures with predetermined spending limits. 

Employee Expense Reports

Employees submit business expense claims for reimbursement with receipts for items over a stated amount in the company policy (or all receipts). The approval matrix includes the employee’s supervisor or manager. 

The approver can approve or reject expenses for reimbursement, depending on if they follow company policy and are reasonable, necessary and ordinary business expenses or personal expenses. 

How to Get Started

Your company policies are a crucial part of the spend pyramid which dictates the characteristics and approach of your approval process overall.

Before you can begin outlining your approval matrix in a visual representation, think about your company spend culture as a whole, and consider the various levels of the spend pyramid that will affect foundational influence on your finished matrix. 

Your company’s culture will influence its structure, which dictates who the stakeholders are (as well as how many). Both company structure and stakeholders will determine your other policies. These can be based on: 

• Budget items 
• Monetary thresholds 
• Special types of purchases 
• Vendors and subsidiaries

Each will differ per organization and rate of growth, and each should be reviewed and solidified before moving forward with the matrix design.

Defining Your Policies

1. Assign approvers according to monetary thresholds

Approval authority is perhaps the most important thing to consider when designing a matrix as part of your business process. It’s common that regular approvers will be bypassed in favor of an approver higher in status if the purchase request for expenditures is quite large or specific. 

For example, purchase requests between $15,000 and $25,000 require the approval of the VP of Finance, bypassing a single manager or many team managers and supervisors before moving the approval flow on to the next step in the approval process. Decide what monetary thresholds you’ll typically be working with, and which approvers are required to sign off on each.

2.  Assign approvers according to specific budget items

Purchase requests from team members in different departments and of different amounts require different approvers. Outline each set of approvers per department and which budget items they are responsible for in the PR and purchase order approval process.

3. Outline the situations and purchases that will require a unique approver

Sometimes, specific purchase requests will require a different approver than usual. What special circumstances in your company will require a unique approver? Be sure to list the details of these circumstances, including purchase amount, budget item, etc. 

4. Assign special approvers to subsidiaries 

Decide on the approving authority or who will be required to approve purchase requests for specific subsidiaries. Each subsidiary in an organization will likely have slightly different processes, maybe even different languages, depending on the location and size. These special approvers may also be in charge of approving new vendors in those subsidiaries.

Defining Your Stakeholders

5. Define all stakeholders and outline each department they are from

Getting a true understanding of exactly who is involved and what team or department they’re a part of will help provide a clear picture of both your key players and more minor stakeholders of any approval process. 

6. Define each tier of approvers

Creating an approval matrix requires organizations to clearly define and outline the hierarchy of approvers. The VP of Finance or CFO is typically at the top, followed by department supervisors or direct team managers. This hierarchy is dependent on company structure, and every company is different. 

Ensuring it All Fits Within Your Organizational Structure

7. Review the hierarchy 

You’re almost there, but before you can put all of this into design you need to make sure that the policies you’ve laid out are supported by your organizational structure. Meaning, your company’s structural hierarchy of teams, departments, and budget ownership is accurately reflected in the way you’ve outlined various stakeholders and policies. 

8. Who gives this matrix the final seal of approval?

After all collaborators have contributed and the matrix is neatly outlined, who is responsible for signing off? Whether the decision making authority is the VP of Finance or the CFO, the approval matrix must be officially accepted and implemented before using. 

New supervisors or department shifts can cause your organization to require amendments or updates to the approval matrix. Stay aware of any changes in hierarchy and make sure all stakeholders are kept informed once those updates are implemented.

Potential Obstacles When Implementing a Payment Approval Matrix

When your business or organization implements a payment approval matrix without automation software for handling its payment approvals, problems arise. A manual system may require manually matching and routing supplier invoices with copies of related purchase orders and receiving reports after researching the authorized approver(s) in the approval matrix. The accounts payable team would consider using emails and spreadsheets to obtain and track approvals. 

Approval paperwork may be lost in the routing process that adheres to the payment approval matrix. Bottlenecks occur throughout the approval process, and delays result when approvers are out of the office. Followup, requiring additional accounts payable staff time, is required to resolve payment approval bottlenecks and obtain approvals for supplier invoice payments. 

Early payment discount opportunities will be lost, increasing the cost of purchases, when invoice processing, including approvals, lags beyond the early payment discount date offered in the invoice payment terms. 

Deploying Your New Approval Matrix  

With a newly implemented approval matrix, your company spending will benefit from an organized set of financial and internal controls. An increase in requesters and spenders doesn’t have to equal a chaotic approval mess; with a matrix in place and a scalable system, you’ll have more visibility (no more end-of-month surprises) and control over each operation.  

If your team relies on manual processes like emails and spreadsheets to manage approvals, the matrix is a welcomed guide that will contribute to more organization and collaboration. However, your new matrix can be amplified with automated tools like cloud-based PO management platforms or vendor management systems that will significantly accelerate your purchasing processes and help you get the most out of your new policy.

Understanding that you need an approval policy in place means you need an approval software solution that can help you streamline communication and eliminate bottlenecks. The time and effort spent designing and organizing your matrix will be wasted if you don’t implement the right tools. 

Leveraging Automation for Seamless Approval Matrices 

Tipalti’s unified cloud platform of finance automation software integrates with your ERP or accounting software. It helps your business automatically apply its applicable approval matrix with approval routing, communications, and notifications to streamline and speed up approval processes, eliminating bottlenecks. 

Tipalti Procurement automation software makes obtaining approvals easy with its built-in approval matrices that can be set up when the software is implemented for your business. Tipalti AP automation software provides automated approval routing for the invoice-to-pay process, complying with your company’s payment approval matrix. 

Tipalti Expense Management automation software enables the creation and approval (or rejection) of employee expense claims through photo-captured receipts using a mobile app and checking these employee expenses against the company policy for travel and expenses (T&E). Tipalti AP automation software works in combination with Tipalti Expenses to reimburse global employees for valid business expenses, following the payment approval matrix. 

To manage maverick spending by employees using a corporate card with a customized approval matrix, Tipalti offers the Tipalti Card to approved users who apply. 

Learn more about reducing purchasing and AP workloads for approvals with Tipalti’s finance automation software, using an automated approval matrix.