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, its 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 organizations 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	PURCHASE VALUE	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	CFO

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
IT	Hardware	Any	IT Manager	CFO
Marketing	Advertising	Up to $10,000	Marketing Manager	CFO
Operations	Supplies	Up to $5,000	Operations 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 TYPE	PURCHASE VALUE	APPROVAL LEVEL 1	APPROVAL LEVEL 2	APPROVAL LEVEL 3
PO-Based	Any	Pre-approved*	N/A	N/A
Non-PO-Based	Up to $1,000	Direct Manager	N/A	N/A
Non-PO-Based	$1,001 – $5,000	Direct Manager	Department Head	N/A
Non-PO-Based	$5,001 – $10,000	Direct Manager	Department Head	CFO
Non-PO-Based	>= $10,000	Not permitted	Not permitted	Not 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 TYPE	PURCHASE VALUE	APPROVAL LEVEL 1	APPROVAL LEVEL 2	APPROVAL LEVEL 3
PO-Based	Any	Pre-approved*	N/A	N/A
Non-PO-Based	Up to $1,000	Direct Manager	N/A	N/A
Non-PO-Based	$1,001 – $5,000	Direct Manager	Department Head	N/A
Non-PO-Based	$5,001 – $10,000	Direct Manager	Department Head	CFO
Non-PO-Based	>= $10,000	Not permitted	Not permitted	Not 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 Head	Finance Controller
$1,001 – 5,000	Department Head	Finance Controller	N/A
$5,001 – 10,000	Department Head	Finance Controller	CFO
>=$10,001	Department Head	CFO	CEO

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 STRUCTURE	PURCHASE VALUE	APPROVAL ROLE 1	APPROVAL ROLE 2
Hierarchical	Up to $5,000	Direct Manager	Department Head
Hierarchical	Over $5,000	Department Head	CFO
Decoupled	Up to $5,000	Project Manager	Finance Controller
Decoupled	Over $5,000	Procurement Specialist	CFO

Critical success factors for approval authority matrices

Implementing the best authority metrics does not automatically make a companys 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.