Purchases are an integral part of nearly every business. So are the headaches that come along with buying. That is unless a purchase approval process has been put into place to streamline and facilitate things.
What Is an Approval Process?
An approval process dictates exactly how something – purchases in this case – must be handled in order to gain approval from the appropriate oversight person, or body, within a company.
Without an approval process for purchasing, companies run the risk of spending more than they earn. The reason for this is simple; it is challenging to keep track of every single expense for every person. At some point, even a few too many reams of paper could tip an organization into the red. This makes it essential to manage a company’s spending accurately.
Understanding the need for a purchase approval process is simple; creating an effective one is somewhat more complicated. In its most basic form, the following components constitute an approval process:
- purchase documents
- permission levels
- due dates
- a record log
The following example illustrates how this works.
An employee realizes that his printer is running low on toner. He requests the purchase and sends it to his supervisor. If his supervisor does not have the authority to approve this expense, then she needs to seek permission from a higher level.
Ideally, these requests will have relevant due dates attached to reflect their urgency. Lastly, whoever is ultimately in charge of these expenditures needs to keep a detailed record log for purposes of both transparency and workflow optimization.
How to Make One
The easiest way to make an approval process is to create an automated one. The complexity of the design greatly depends on the scale and spending culture of each organization. Many companies choose to use vendor management software to facilitate their approval processes.
The first step is to visualize the workflow. In other words, think of the people who will need to use this function. Who will they need to seek approval from? Will single-step approval be sufficient in all cases, or will some purchases need two-step approvals?
Once all of this has been laid out, input the required information into the automated program and follow the prompts to fill in the necessary extra information.
Three Strategies and Methods to Spend Management
Vendor management best practices require many processes. A purchase approval process is one component of spend management. Managing spending will effectively control costs and improve business efficiency. Below are three strategies for effective spend management.
Understand the Process
Those who evaluate spending and those who do the spending need to clearly understand the company’s rules and parameters regarding cash flow. Solid training and a detailed policy will go a long way towards reducing confusion about proper procedures and unnecessary expenses. Not to mention, a full understanding of the process allows for better control over the company’s vendor management inventory.
Hold People Accountable
Everyone in the company must be held accountable for adhering to policies for them to be effective. This holds true for the people on the ground doing the sourcing, up to the department heads. The finance department should not have to waste time chasing for answers as to why someone, or some team, consistently overshoot their budget.
Getting employee buy-in for these policies will reduce headaches and increase productivity throughout the company. A vendor management process helps all these parties claim responsibility.
Use Clean Data
Poor data results in poor decisions. Especially when discussing cash flow, clean data is imperative for accurate, informed decisions. A 2011 study by the Hackett Group, on critical issues related to procurement, demonstrates how much companies value useful data:
Examples of poor data include:
- Incomplete information
- Duplicate data
- Integration errors, i.e., when data from different types of forms are merged in a database and don’t match up correctly
Purchase approval processes and spend management are incredibly effective ways to optimize a company’s spending practices. They are both crucial components of any vendor management system. Although they both may take a little bit of work to strategize and implement at the outset, the financial savings and improvements in efficiency will quickly overtake any initial frustrations.