A flowchart illustrating the purchase order process. curve

How to Implement a Purchase Approval Process

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Does your organization have a standardized, efficient approval process in place? Even if the answer is yes, odds are it’s severely lacking. Fast growing companies typically rely on poorly shaped or unofficial approval processes when it comes to handling their purchasing and procurement. Emails and direct messages, spreadsheets, and tickets do not suffice. And legitimate approval processes can still lead to miscommunication, lost information, and ultimately mismanaged spending. 

You’re ready to take a good look at your existing approval process, highlight all the places where there’s room for improvement, and begin crafting a new and efficient approval process that won’t frustrate or slow you down. 

We’ve outlined exactly how you can build and introduce a new, effective purchasing approval process and avoid these common pain points altogether. 

What Is an Efficient Purchase Approval Process?

A purchasing-oriented approval process is the method in which approval of purchase and all related actions are approved. Depending on the size of the organization and how many stakeholders are involved in the approval process, the flow and amount of approvers can differ. But regardless of organizational structure, it all starts with a purchase request that goes through a review, generates a purchase order, and ends with paying for a good or service.

Typically, it will follow a general structure like this:

  • Purchase request form
  • Purchase request review
  • Budget review
  • Vendor request form
  • Vendor review
    • Legal + IT review
  • Purchase order generated
  • Invoice received
  • Goods Received note
  • Payment issued

Why Approval Processes Are Crucial to an Organization’s Productivity

Your company’s official approval process should be implemented as soon as its need becomes clear. In the early life of an organization, operating with spreadsheets, emails, or other manual processes will suffice. But as companies grow and processes become more complex, they will require a change in approach. The larger an organization and the more purchase requests that are opened, the harder it becomes to see the full picture. A standardized approval process provides a way to maintain visibility throughout each purchase approval and easily keep track of moving parts.

At the most basic level, official approval processes are put in place and followed carefully in order to: 

  • Control costs 
  • Ensure compliance
  • Eliminate fraud

Without an approval process in place teams will struggle to stay productive, and to control costs, which are often wasted in unnecessary spending. On average, companies lose between approximately 10%-20% of their projected savings to maverick spending each quarter. How can you consistently lose such a sizable chunk of money without knowing how or where it’s gone? Maverick spending is not something inevitable that you must learn to learn to live with. If you understand how to identify issues in your process, and improve it overall, you’ll be on your way to shaping a more fast-paced efficient work environment and eliminating unmanaged spending. 

Why should finance teams care about having an approval process?

You’ve probably noticed by now that there are multiple scenarios in which the lack of an approval process causes you friction. 

  • When you close the month
  • When it’s time to prepare reports
  • When you find yourself chasing information
  • When it creates manual work for your team members

These each translate into limited control over a very important process, and ultimately, wasted time. Trying to close out the month or prepare accurate reports without an approval process causes headaches, missing information, and definitely doesn’t provide an updated or reliable set of data. It’s time to implement an approval process that is easy to follow and supports your team’s productivity.

The Anatomy of a Top-Notch Approval Process

Each organization will have different needs and requirements for their approval processes. But we’ve come up with a framework for outlining an approval process that every business should follow regardless of size, growth, or number of stakeholders involved.

A pyramid image showcasing tools and processes, focusing on purchase order management.

1. Culture

The foundation of your approval process lies in your company’s spend culture. How does your organization currently handle making purchases? What are the normal behaviors, practices, and values in place when it comes to making important decisions on spending? These organizational values and expectations are referred to as spend culture, and will go on to impact how an organization works to outline an approval process. All steps taken to create and follow an official approval process will build atop this baseline that is spend culture. 

If you make an effort to truly understand your spend culture, you will have an easier time shaping and guiding it as your company evolves. Your spend culture, and therefore your approval processes will continue to take shape as your teams expand and change, helping you to have more control over executing those shared company practices and values. 

2. Structure

How is your organization divided into departments and teams? Is there a purchasing and procurement team or does procurement fall under the umbrella of finance? Do you operate with a VP of finance, a CFO, or comptroller? The organizational hierarchy of your teams and departments will influence who is assigned as an approver, and at what stage, in an approval process. This structure is especially important to organizations dealing with indirect procurement as it involves the entire company, from the average requester to the highest level of professional approver.

Your company’s organizational structure is also very closely connected to, and sometimes designated by, its budget owners. The budget owners of a finance or procurement team, and those who have budget accountability will help to determine a hierarchy of approvers that will oversee the entire approval process. 

3. Stakeholders

The various stakeholders of an approval process can be simplified into three groups:

a. Requesters

Any employee who may request the purchase of goods or services.

b. Approvers

Any manager or supervisor put in charge of considering and approving their employees’ purchase requests. Approvers can be categorized as:

  • Managerial approvers – A manager, supervisor, or budget owner. This approver is interested in a simple, smooth process that gives them control and visibility over their teams’ purchasing activities. They are usually the ones to approve of the need for a specific request, as well as the specific budget allotted. 
  • Professional approvers – Members of legal, IT, security, or FP&A teams. This approver is interested in getting involved early and is looking to maximize cost savings, compliance, and accurate data for reporting or forecasting purposes. They also approve the budget from a higher, more company level viewpoint and ensure compliance within the process. 

c. Vendors

Whether already consistently working with your organization, or new vendors who need to be onboarded, they are a crucial piece of the puzzle and an important player whose behavior greatly influences the movement of the purchasing process. 

Multiple stakeholders can be pulled into the approval process at any time, as approvers

can consult with each other before approving a purchase request and opening a purchase order. Additionally, understanding the goals of stakeholders like the CFO, IT department, or other higher-up approvers is important to building an approval flow that supports everybody’s needs. 

4. Policies

Before you can really begin issuing and approving purchases, there needs to be a set organizational policy in place that addresses how to proceed in specific scenarios according to:

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

This policy will also work to determine what information is needed when filling out and submitting a purchase request. 

Do it Right: Design an Airtight Approval Matrix

Defining the various stages of your team’s approval process including exactly who is required to sign off on certain behaviors within those stages will become known as your official approval matrix. The approval matrix encapsulates the relationship between the culture, structure, stakeholders, and other policies of your organization. It can be complex, but it’s really just a company’s official protocol visually outlining how to handle the approval process as a whole. 

In growing and large companies, there are multiple levels of required authorization and accountability before a purchase can be made. This matrix helps requesters and other team members stay on track and have something for reference if there are any doubts as to who an approver for a certain purchase should be. Businesses should take their time in crafting an approval matrix because it will continue to serve them for years to come. 

When creating your approval matrix, It helps to clearly define each tier of approvers like a map that guides users to their destination. Everyone involved in the process will be able to refer to it, easily find the tier or stage in which they fit, and understand who needs to sign off on any of their requests. Who should the approvers be? That’s for each organization to decide for themselves, but they generally consist of direct managers and supervisors, all the way up to the VP of finance or CFO. 

Mapping your approval matrix is an additional opportunity to look at how your organization’s process is currently working, as well as pinpoint specific areas that may be causing things to become slowed  down or stuck. Being uncertain of who is next in the flow, or with whom something is being held up, is a major reason for limited visibility in the procurement process. 

What are the Steps for Creating an Approval Matrix?

  • Identify all approvers and stakeholders
    • What supervisors or managers will need to approve purchase requests? Who are the stakeholders and various departments involved?
  • Assign approvers according to monetary thresholds
    • (i.e. purchase requests between $10,000 and $20,000 require the VP of Finance to approve before moving to the next step in the approval process.
  • Assign approvers according to specific budget items
    • Purchases in different departments and of different amounts require different approvers. 
  • Identify specific scenarios and types of purchases that will require a unique approver 
    • What special circumstances will require a different approver than usual?
  • Assign special approvers to the onboarding of new vendors
    • Decide who will approve a new vendor when compared to one who’s already been onboarded and is in the system.
  • Identify the individuals responsible for signing off on the official matrix once completed
    • Who will have final say as to the official matrix after all collaborators have contributed?

Once you have the above criteria outlined visually, it will be much easier to begin mapping and to see where you should be making adjustments. Finally, update your approval matrix when needed. It’s naturally subject to change. If new employees are onboarded or the structure of certain departments is altered, the layout of your matrix should reflect these changes as well. 

5. Tools

The final piece of the approval process framework, or the top of the pyramid if you will,  is the tool or tools you will use to carry out your process successfully. 

All too often organizations will rely on cumbersome manual processes or third-party apps that are complicated and difficult to use. These generally don’t support an efficient workflow, they offer difficult navigation that doesn’t encourage employee adoption, and they harm your organization’s efficiency.

Your ERP: Nearly all companies dealing with procurement must resort to using an ERP. They can be rigid and limiting, hard to customize, and even hard to use. They also house a lot of sensitive information that you probably don’t want all employees having access to. But all of this doesn’t mean that your ERP has to hold you back. Many solutions work with your existing ERP to provide flexibility, expedited processes, and superior visibility into critical operations such as vendor management. 

Manual processes: You’ve already admitted that ad-hoc emails, spreadsheets, Slack messages, tickets, and more of the like are harming your workflows. There is no reason for a mid to large size, growing business to resist automated processes any longer. Finding a simple tool that can support all of these actions in an organized and simple framework will save time and take a lot off of your plate.  

Onboarding a cloud-based solution that eliminates friction and supports each stakeholder is the ultimate answer when it comes to implementing the right tool. You should look for something simple, customizable, and fast to deploy. 

How to Avoid Mistakes in the Approval Process

With a solid approval matrix set and issues in your existing approval process identified, your organization can look to implementing your new approval workflow. You’ve probably found that most of the factors contributing to a labored and inefficient process have to do with manual tasks. Manual workflows are all around inferior. Workflow automation is what will help you actually correct the issues you’ve addressed and take your organization to the next, far more efficient level of procurement operations. 

Create a smooth approval process workflow

Support flexible flows: When defining your approval workflow, keep in mind that it needs to follow your outlined matrix and remain flexible in order to accommodate any custom rules your business may have. 

Assign advanced actions: Siloed processes and communication that isn’t streamlined are some of the most common reasons for an inadequate workflow. Make sure you define places in the approval flow that support communication and visibility. For example, look to features that alert IT or the legal team when something is pending their attention before approval. 

Manage approvals: Keeping an eye on the approval process can be difficult. Set smart reminders along the flow to assist you in moving the approval process through the pipeline quickly.

Utilize Tech to Automate Your Approval Process 

With your new process and workflows set in motion, automating them will be what takes you over the top. Successful companies are looking to automation. It’s time to onboard a new solution that makes your approval process easy and efficient, as well as contributes to all around expedited business processes across teams and departments. 

What are the benefits of automating your approval process?

You know that manual processes lead to messes. They are clunky and cause roadblocks that can lead to all out crashes, or they can contribute to issues that live under the surface and are harder to detect. Make sure your team is using an automated process for their approval process workflow and very quickly experience:

  • Faster turnaround: No more ping ponging. Requests will get approved faster and the purchases you need will get placed faster.
  • Full visibility: You’ll have the full view of the approval process at all times and will be able to quickly and easily see a history of all actions taken.
  • Easier to identify bottlenecks: You’ll be able to see exactly where something is getting stuck and avoid waiting around for the pace to pick up.
  • More individual accountability: With more visibility, individual approvers know their responsibilities and must remain accountable.
  • Smart notifications and reminders so you don’t lose track of things
  • Better view of budgets and forecasting: With maverick spending greatly reduced or eliminated altogether, budgeting and forecasting become more accurate. 
  • Centralized storage: You’ll be able to easily store and access all important information such as invoices and receipts, subsidiary data, reports, and more. 

These benefits sound so crucial to your process that you might be worried about cost. Are you wondering if it’s financially worth it to implement a new automated solution? What are the cost implications of a manual approval process? Specific amounts will of course vary per organization, but there are a myriad of hidden costs in a manual approval process.

Without automation, you can expect to face: 

  • Mismanaged or maverick spending
  • Missed negotiation opportunities when building relationships with vendors, leading to more expensive deals
  • Slower turnaround times that cost money each quarter
  • The possibility of fraudulent invoices 

Overall, manual processes end up costing more money to an organization in the long run. And if a business is quickly growing, these costs grow with it. Automated approval processes should be the only processes considered in this day in age. 

Post Implementation: What Does it Look Like?

After successfully implementing an automated solution, it may be tempting to think it’s all smooth sailing! It is for the most part, but staying on top of your new approval process will help you and your team members stay in-the-know and ahead of any potential issues. 

Periodically running maintenance to make sure third-party apps are updated, and checking in with users to hear direct feedback are great ways to stay aware of usage trends in real time. Approvers and team leads should also make a point of identifying any places in the process where users may tend to get stuck or require additional support. Employee adoption is a huge factor in the success of an approval process, so making sure your approval processes are being used correctly and consistently by team members is a major key in supporting a fast moving flow and overall efficient business operations.

Ultimately, the success of your new approval process will depend on how well you can work as a team to:

  • Identify existing issues and mistakes
  • Create an updated, organized, and official approval matrix
  • Maintain visibility over the actions of involved stakeholders
  • Automate your process and drive user adoption 

With this guide, you’ll be able to implement a new approval process that prevents you from encountering bottlenecks, expedites your workflows and business operations, and sets you up to welcome the challenges and changes of a growing, successful organization.

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