Let's face it, running a business does not only involve generating a profit, but also managing expenses. A critical component of managing your business expenses is having an efficient, consistent, and repeatable purchase approval process. It allows you to provide your team with the tools and products they need to do their job while, at the same time, enabling you to curb unnecessary spending and purchases.
In this post, we'll look at what a purchase approval process is and how you can develop your own purchase approval process.
What is the Purchase Approval Process?
Simply put, the purchase approval process is the process your team will follow every time your business needs to purchase goods or services. In other words, it's the process your business will use to receive, approve, and submit purchase orders for goods or services.
Now that we've seen what a purchase approval process is, the immediate question is: How does it work? The process usually starts when your business needs a specific product or service. The relevant team member will then prepare a purchase requisition which will be forwarded to the appropriate stakeholder, whether it's a purchasing manager, accounting manager, or even you, to be approved.
Once you or another stakeholder has approved the purchase request or requisition, you‘ll create a purchase order that contains all the information about the order. This purchase order is then sent to the supplier to order the products.
What are the Benefits of a Purchase Approval Process?
One of the major benefits of having a purchase approval process is that it's consistent and repeatable. And when a process is consistent and repeatable, it will be more efficient as everyone knows what steps to follow in the process and who needs to approve purchases.
Another major benefit of a consistent purchase approval process is that it helps you control your business’s spending, in that it enables you to eliminate any unnecessary expenditure. In addition, a purchase approval process helps you determine if you have the budget available before you make any purchases. So, in that sense, it helps you plan your purchases better.
Developing Your Purchase Approval Process
Let's now consider how you would go about developing a purchase approval process for your business. Here, how you set up your purchase approval process depends on whether you're following an amount-based process, categories-based process, or a budget-owner’s approval process.
As the name implies, with an amount-based approval process, you‘ll develop tiers above which only certain stakeholders can approve purchases. For example, you might determine that lower-level approval is sufficient for smaller purchases while larger purchases, for example, more than $2000, should be approved by senior management.
Using this approach, you should be careful not to labor senior management with too many approvals. So, it might be worth your while to investigate your purchases over the past 12 months to determine how many purchases senior management would have approved. Ideally, you want senior management to approve only about 20% of your overall purchases to the value of 80% of your overall spending. If you find that, over the past 12 months, senior management has approved more than that, you should increase the threshold.
Your next option is to use a categories-based process. Here, you’ll sort all your purchases under separate categories and develop a framework where certain categories don't need approval, other categories need approval from mid-management or certain teams, and others from senior management. Once again, your post purchases will show you if a categories-based approach is a workable solution for your business and its specific needs and requirements.
Finally, you can also choose to use a budget-owner approval approach. When using this approach, you’ll first need to decide who the budget owner is. This could be the person responsible for the department, like a manager, or someone in your finance department that oversees your business’s budgeting.
Once you've decided who the budget owner is, you’ll then determine when they have to approve a purchase. For example, you might require that they approve every purchase or that they only approve purchases beyond a specified threshold.
These are just three examples of the different types of purchase approval workflows you can use to approve purchases. You can decide to use one of these or even a combination that best suits your business’s unique needs and requirements. However, no matter what approach you use, the most important thing to remember is that your process and workflow should be efficient while, at the same time, allowing you to control your spending.
Automating Your Purchase Approvals
While a consistent purchase approval workflow can go a long way to improve your efficiency when you need to purchase goods or services, you can take it one step further. By using automation, you can make the process more efficient and eliminate manual tasks, errors, and long approval wait times while still reducing overspending.
Automated platforms like ControlHub can help you do this with ease. To learn more about ControlHub and how we can help you, visit our website for more details.