Hold-ups in reviews and approvals are the most common reason for procurement delays. This happens because of either a poor approval workflow or the lack of a formal process.
These two issues are especially common in fast-growing companies. When the business is small, a couple of emails and minimal paperwork may be enough to procure goods and services.
But as the business grows, so do budgets and the number of employees. This adds complexity to the purchase process, and with it, the risk of bottlenecks, overspending and fraud.
Implementing a formal purchase approval workflow offers the following benefits:
Drastically reduces delays, which is particularly important for time-sensitive purchases.
Less friction in the company since roles and permissions are clearly outlined.
Lower risk of fraud and mismanagement since there are multiple layers of oversight.
Greater visibility in budgeting and spend.
Improved document audit trail. Instead of having scattered paperwork, you can create and retain documentation at each stage of approval.
When it comes down to it, a proper purchase approval workflow is a competitive advantage of businesses. It reduces time delays, increases employee productivity, helps with cost control and eliminates fraud.
The Structure of A Purchase Approval Workflow
Request → Review → Approve/Decline
This is the standard structure of any approval process. You can adapt it to fit your organization’s processes and hierarchy. Typically, a business will have multiple workflows depending on the department, type of purchase and dollar amount.
For example, a $10,000 purchase requisition for next year’s office supplies may go through multiple levels of review and approvals starting from department heads all the way up to the executive level.
In contrast, a requisition for a $20 keyboard may only go through a single level of approval.
Within the three main steps is where you configure roles and permissions to decide who can review and approve various requests. You also design the approval routing, ensuring the right people are involved in making critical decisions.
How To Design and Implement a Purchase Approval Workflow
Here are the best practices for creating a purchase approval workflow that works smoothly.
1. Start With Planning and Consultation
Involve all stakeholders in designing a purchase approval workflow. You will receive valuable suggestions and it makes implementation easier when everyone is onboard.
Importantly, it makes it possible to design a workflow that is suitable and works for the company.
You can start with a standard template and then customize it based on feedback from employees, department heads, managers and executives.
Certain departments such as accounting and legal are especially important stakeholders as they are essential in many of the workflows.
2. Document It
If it’s not written down, it doesn’t exist.
The problem with many growing businesses is that they still rely on an informal and unspoken purchase approval process. This ends up in confusion, bottlenecks and financial mismanagement.
Formalize your approval workflow by documenting it. Keep it simple and clear so that anyone in the company can refer to it.
Document all aspects of your workflow: list of approvers (their positions, not their names), their roles and permissions within the workflow, approval time limits, documentation policies and so on.
3. Have Multiple Approvers
A good purchase approval workflow contains multiple levels of oversight. This reduces the risk of fraud and ensures that all critical decision makers are involved in purchase decisions.
With multiple eyes looking at the documents, it also helps catch any errors before the process moves too far along.
Workflows for high dollar purchases will naturally have more levels of oversight, usually reaching up to the C-suite. For small purchases using petty cash, you can have just the department head or immediate boss as the only level of approval needed.
Workflows involving sensitive purchases may include additional reviews and approvals from IT and legal.
You can also have a different workflow with fewer levels for recurring purchases from established vendors.
Think of all the purchases the business regularly makes. Group them in categories based on dollar amount, how critical they are to business operations, and other aspects. Then design workflows for each category.
4. Set Clear Roles and Permissions
For each person who is involved in reviewing and approving requests, set out clear roles and permissions.
Determine who can kickstart certain processes such as creating a requisition (e.g. any employee or only department heads?), generate a purchase order or set a budget.
You may also have some people whose role is just reviewing requests, then passing them along to the next level for approval or decline. This is common with purchase requests that need a legal review or a security check.
You can set roles and permissions based on dollar amounts. For example, some roles can only approve or decline purchases below a certain amount.
5. Set Time Limits
A well defined purchase approval process is pointless if people do not fulfill their roles on time. One person can hold up the entire workflow, resulting in delays, inefficiencies and frustrations.
Make sure there is a proper reporting or notification mechanism in place. When documents move to the next level, the person in that role should immediately be made aware of it. Digital communication like email and Slack work well for this.
To reduce the risk of bottlenecks, set out time limits for reviews and approvals. Make it clear in your documentation what happens when this limit elapses.
For example if a purchase order lands on a manager's desk, how many days do they have to review and act on it?
If this time passes, is the PO automatically closed, does it move to the next level, does it go back down one level or is there someone else at the same level who can approve it?
6. Tracking and Document Retention
Find a way to track the movement of a request through the various levels. The best way to do this is using workflow tracking software.
Additionally, have a strict policy of document retention at each stage including requisition forms, notes, purchase orders, communications, receipts, invoices and so on.
This is important for three-way matching during invoice processing, future audits and other critical applications.
7. Automate It With Software
Doing all of the above manually gets increasingly tedious as the business grows. Spreadsheets, physical forms, paper invoices — these often lead to confusion, demand more physical storage space, are time consuming to process and hunt down, and are not eco-friendly.
Automate as much of the process as possible. There are software that can automate individual steps in the workflow e.g. requisition software, workflow tracker, RFP response management software and so on.
But if you are not careful, having disparate applications can result in more confusion, lost documentation and lost savings.
We recommend end-to-end software that automates most of the processes involved in a purchase workflow. Procure to Pay software (P2P) like Aruba, Procurify and SpendWise are the best choice.
Most P2P software allow you to design a customized workflow with automated rules, policies and permissions.
They also make approval routing automatic, cutting down on delays and bottlenecks.
P2P software saves time since people don’t have to fill out tons of paperwork. They also provide greater visibility, which eliminates fraud, improves strategic decision making and plugs any wastage areas.
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