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Best practices for optimizing purchase requisitions, invoices, and payment approvals

Creating a comprehensive and efficient purchase requisition, invoice, and payment approval process is crucial for organizations to maintain operational efficiency and financial control. Given the diversity in practices across companies, it’s beneficial to consolidate best practices that can serve as a guideline for establishing or refining these processes. This blog aims to outline these best practices, incorporating examples and illustrations to provide clear insights.

Understanding approval authority matrices

An approval authority matrix is a framework used by organizations to define who can approve expenditures and at what thresholds. The complexity of these matrices can vary based on the organization’s size, structure, and operational needs. Here are some foundational best practices:

1. Layered approval levels based on purchase value

A common practice is to implement multiple levels of approval based on the value of the purchase. For example, purchases under $1,000 might only require approval from a direct manager, while those exceeding $10,000 require additional sign-off from a department head or even the CFO. This tiered approach ensures that higher-value transactions receive more scrutiny.

Purchase Value Approval Level 1 Approval Level 2 Approval Level 3
Up to $1,000 Direct Manager N/A N/A
$1,001 - $5,000 Direct Manager Department Head N/A
$5,001 - $10,000 Direct Manager Department Head CFO
Over $10,000 Department Head CFO CEO

2. Department and expense type consideration

Some organizations adjust approval levels based on the department making the purchase or the type of expense. For instance, IT hardware purchases might follow a different approval path than marketing expenses due to the specialized knowledge required to evaluate such expenses.

Department Expense Type Purchase Value Approval Level 1 Approval Level 2
ITHardwareAny IT Manager CFO
MarketingAdvertisingUp to $10,000 Marketing Manager CFO
OperationsSuppliesUp to $5,000Operations Manager Department Head

3. Vendor purchase aggregation

Tracking gross purchases from the same vendor across multiple requests helps in negotiating better terms and identifying opportunities for bulk discounts. This also ensures better internal financial control. This approach requires a more sophisticated tracking system but can lead to significant cost savings.

Vendor Purchase Total Across Multiple Purchases Approval Requirement
Up to $5,000 Direct Manager
$5,001 - $20,000 Department Head
Over $20,000 CFO

This can be additional authority metrics in addition to 1 or 2 outlined as above.

4. PO-based vs. Non-PO-based invoices

The process for approving invoices can differ for purchase order (PO) based and non-PO-based transactions. PO-based approvals typically follow a more streamlined process since the purchase has already been pre-approved at the requisition stage. Non-PO transactions may require additional verification steps to ensure they are legitimate and necessary.

Invoice TypePurchase ValueApproval Level 1Approval Level 2Approval Level 3
PO-BasedAnyPre-approved*N/AN/A
Non-PO-BasedUp to $1,000Direct ManagerN/AN/A
Non-PO-Based$1,001 - $5,000Direct ManagerDepartment HeadN/A
Non-PO-Based$5,001 - $10,000Direct ManagerDepartment HeadCFO
Non-PO-Based>= $10,000Not permittedNot permittedNot permitted

* PO-Based invoices are considered pre-approved at the requisition stage but may require final verification through system based matching logic..

5. Unified vs. Separate invoice and payment approvals

While a few companies combine invoice approval and payment authorization into a single step, most others separate these processes to add a layer of control. Separating these steps can help in identifying discrepancies before payments are made.

For example for company A the invoice approval could be as per the following table:

Invoice TypePurchase ValueApproval Level 1Approval Level 2Approval Level 3
PO-BasedAnyPre-approved*N/AN/A
$5,001 - $10,000Up to $1,000Direct ManagerN/AN/A
Non-PO-Based$1,001 - $5,000Direct ManagerDepartment HeadN/A
Non-PO-Based$5,001 - $10,000Direct ManagerDepartment HeadCFO
Non-PO-Based>= $10,000Not permittedNot permittedNot permitted

And for the same company the payment approval would be as follows:

Purchase Value Approval Level 1 Approval Level 2 Approval Level 3
Up to $1,000 Direct Manager Department HeadFinance Controller
$1,001 - $5,000 Department Head Finance ControllerN/A
$5,001 - $10,000 Department Head Finance Controller CFO
>= $10,000 Department Head CFO CEO

Where in there could be another company which could have unified approval of invoices and payments as above. The best practice is to keep it separate.

6. Hierarchical vs. decoupled approval structures

Organizations must decide whether the approval hierarchy should mirror the organizational structure or if it should be decoupled to allow for more flexible and efficient processing. Decoupling can be advantageous in organizations where cross-departmental purchases are common.

Approval StructurePurchase ValueApproval Role 1Approval Role 2
HierarchicalUp to $5,000 Direct ManagerDepartment Head
Hierarchical Over $5,000Department HeadCFO
DecoupledUp to $5,000Project ManagerFinance Controller
DecoupledOver $5,000Procurement SpecialistCFO

Critical success factors for approval authority matrices

Implementing the best authority metrics does not automatically make a company’s approval process optimal and efficient. The following factors play a critical role in that. 

  • Clear documentation and accessibility: Ensure that the approval authority matrix and related procedures are well-documented and easily accessible to all employees. This promotes understanding and compliance. If you are using software, let it be accessible through online help and FAQs.
  • Regular training and updates: Provide regular training sessions to keep all employees updated on any changes to the approval processes. This is crucial for maintaining the integrity and efficiency of the system. The update can also be through an email, an internal blog, or through a video.
  • Leverage technology: Implementing an automated system can streamline the approval process, reduce errors, and provide a clear audit trail. Make sure that your ERPs and automation tools have a single source of truth for approval authority metrics.
  • Monitor and review: Regularly review the effectiveness of the approval process. This includes analyzing turnaround times, compliance rates, and any bottlenecks. This can be easily obtained as reports if you have implemented the right technology.
  • Vendor management: Incorporate vendor performance and expenditure tracking into the approval process. This can help in making informed decisions about future purchases and negotiations. Again right analytics and reporting in the tool that you are using will help facilitate that.
  • Transparency and accountability: Ensure that the process promotes transparency at all levels, with clear accountability for each approval step. This reduces the risk of fraud and promotes a culture of trust.

Conclusion

To conclude, with the right mix of policy, process, and technology, organizations can ensure that their procure-to-pay approval cycles are both efficient and effective, paving the way for fiscal responsibility and long-term success.

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