When thinking about success, most organizations focus on revenue. Companies implement complex business processes, management systems, accounting tools, and ERP solutions to track every dollar affecting the bottom line. As recently discovered, however, one of the main reasons companies fail (the second reason according to CB Insights) is poor cash flow management. Understanding how your company is spending money is as important as understanding how revenue is generated.
Spending is an integral part of every business. So are the headaches that come along with spending and buying. That is… unless a spend approval process has been put in place to provide clarity around spend and purchasing flows to all stakeholders.
An approval process is a formally defined way within an organization to get things done. Approval processes can be set for budgets, marketing campaign spend, new vendor vetting, equipment for new hires, team member expenses, and much more.
Well-designed approval workflows protect your organization from running wild, going over budgets, and running out of cash. What’s more, they also streamline the entire procurement process and help team members save time. This allows them to redirect focus on value-added tasks.
Too often, companies rely on face-to-face conversations, emails, phone calls, and a variety of random documents to align everyone. As companies grow to more than 20 team members, however, these practices become very inefficient.
The spend pre-approval process defines internal control policies for all types of purchasing and expenses within the organization.
The reason for implementing spending controls (also known as approval routing) is simple: to ensure all spending is accounted for. When managers approve spend requests, an organization can safeguard its assets by minimizing the risk of inappropriate purchases. What’s more, it can also ensure the accuracy of optimization of spend requests.
Without an approval process for purchasing and expenses, companies run the risk of spending more than they earn. It is challenging to keep track of every single expense that every person puts through. At some point, even a few too many email threads or Google documents can tip an organization into the danger zone. In other words, managing the company’s spending becomes essential.
Here’s a visual example of how the approval process works when a new hire starts at a company and requires a new laptop and software license:
Evidently, the need for a formalized spend and purchase approval process is quite clear. When designing an effective approval process to control spend, necessary components includes five steps:
Step 1. The request for spend or the spend approval request
The process starts with a request for spending, also known as a purchase order, requisition, request for purchase, or a request for order. It’s a formalized step for every team member to state their need for a new purchase or budget such as new software subscription, new budget for a marketing campaign, or a new laptop.
A lot of companies confuse the requisition with the purchase order approval process and simply implement purchase order approvals. These are not the same, though. Read more to learn the difference between a purchase requisition and why it is important for your business.
Requests for purchase approvals promote proactive spend controls as opposed to invoice approvals when the purchase has already been placed with the vendor. Read more about Invoice Approvals vs Purchase Approvals: Why They’re Not The Same & Why It’s About Time You Realized It
Step 2. Approvers and budgets
The approval chain or approval routing includes all the stakeholders that are required to approve the spend before it happens. When set up in a purchasing or spend management system, the chain automatically routes requisitions to appropriate managers who then approve or reject the request. Based on the type of purchase, dollar value, account code, and project, approvers have the ability to edit the request, and it may require multiple approvals.
Without a well-documented purchase approval process, the account payable team is more likely to spend late nights at the office tearing their hair out! When invoices pour in to be paid, accounts payable teams need a fast and reliable way to verify the validity of invoices without additional investigative work that usually requires numerous follow-ups and chasing of different departments. Consequently, this also impacts the efficiency of the month-end close, as AP sub-ledgers need to be closed and quickly reconciled to support accurate financial reporting.
For companies that set departmental budgets, approvers are responsible for confirming that the purchase request is within budget. That’s why it’s important to ensure real-time budget visibility is provided instantly to managers and department heads responsible for company spending.
Spend management software systems, like Procurify, involve heightened transparency within the process workflow. They requires managers and approvers to document and note why they approved or rejected the request or submitted a report. With a digital audit trail and streamlined approval process, then, there is no more room for lost information, records, or reports.
Step 3. Permission levels
Understanding what roles in the company have approval power is just as important as understanding the approval limits for each permission level. These will differ by company, and sometimes even by industry. At some companies, team members don’t need formal approvals for purchases or expenses below $50. In specific industries, such as biotechnology, all biohazardous materials require approval from the heads of engineering. Many fast-growing software companies also require CFO approval for purchases over $5,000. For other types of spending, some organizations might require a legal review of certain expenses.
Permission levels should also account for when the approver is not available or is unresponsive, for example, on vacation, on a sabbatical, or on parental leave. Luckily, modern cloud-based spend management platforms, like Procurify, allow you to create a fully automated approval process with approval delegation to cover for these cases.
Step 4: Timeframes
This discussed approval process is only valuable if it removes bottlenecks for your team and gives them back time in their day. To achieve this, though, any team member who is requesting spend should indicate the accurate due date for the spend to be approved. Crystal clear timelines help streamline the purchase process and also set the right expectations with all vendors.
Step 5: Approval logs
Audits. You can dread them or be well prepared for them and easily breeze through every audit. Whether you’re relying on spreadsheets, emails, or a spend management platform, ensure that there is a way to access the secure audit trail and track the approval process for spend and order requests.
To make sure that your team doesn’t wait for approvals, we recommend documenting every single part of your approval process in a formal spend policy template. This policy should become an essential part of your company’s Spend Culture.
The burning question is: what’s the most effective way to an approval process in your organization? Well, the easiest way is the automated way. The best procurement software helps companies customize approval workflows by dollar thresholds, users, departments, and locations.
Don’t worry. How you design the workflow doesn’t need to be complex. Your custom workflow, however, will depend on the scale and spending culture of the organization. In fact, many companies choose to use spend and vendor management software to facilitate their approval processes.
Here are six questions every organization should ask themselves while designing their approval processes:
- What types of purchases do we currently have in our company? Are these purchases specific to departments, locations, or projects?
- Who needs to sign off on specific types of purchases (e.g. capital assets, legal invoices, etc) or approve certain expenses?
- Do we have a minimum dollar threshold for approvals?
- Will single-step approval be sufficient in all cases, or will some purchases require two-step (or multi-step!) approvals?
- Where do we maintain budgets, and how will we provide visibility into budgets to approvers?
- How do we facilitate requests for spend from all the team members in the company?
Next it’s time to visualize your workflow.
- Controlled cash flow with less risk for rogue spend (a.k.a your enemy maverick spend).
- Operational efficiencies with transparent and easy-to-follow spend policies.
Clear and automated approval workflows help companies save hundreds of hours in the accounting and finance functions, as well as across the organization.
- Negotiating power with vendors. With a full picture of advanced orders, you can negotiate with top vendors for preferred pricing.
- Full visibility into budgets and budget compliance.
- Audit compliance. Be ready to report to your auditors, board, investors, and the team on every dollar spent.
Spend management starts with spend approvals
Spend approval processes and spend management are effective ways to optimize a company’s spending practices and control spend. Designing an automated approval routing process helps everyone at your organization understand the preferred procurement process. It also holds people accountable to what they purchase, and above all, it safeguards the company’s assets. It also helps leaders make better business decisions.