Purchasing approval policies and workflows play a critical role in maintaining financial control at any organization. Businesses, non-profits, and other entities all benefit from having clear approval policies and processes in place to ensure that purchases are made with transparency, accountability, and prudence.
Establishing approval policies and workflows requires thought and effort. In this article, we’ll explore five key elements to creating effective purchasing approval policies and workflows.
1. Identify Risks
The foundation of any purchasing approval policy lies in identifying potential risks. Understanding risks will make it easier to design ways to address them.
Potential risks may include:
Unnecessary purchases: Purchasing goods or services that are duplicative or not important to the success of the organization.
Paying too much: Purchasing from vendors who do not offer the best pricing or in a way that undermines potential discounts.
Conflicts of interest: Purchasing from vendors where there may be a financial or personal conflict of interest.
Misappropriation of goods: Some purchases may involve items that are easily resold or misused, leading to theft or fraud.
Circumvention of controls: Employees may attempt to bypass approval processes by, for example, splitting large purchases into multiple smaller ones to stay below approval thresholds.
By identifying potential risks, you can design specific approval policies and workflows that are customized to address and mitigate those risks. This targeted approach ensures that policies are not only relevant but also effective in preventing issues like overspending and fraud.
2. Analyze Data
Effective approval policies are not created in isolation; they must be grounded in a thorough understanding of the organization's past purchasing activities and future plans.
Analyzing past purchasing activities involves running detailed financial reports to gain a comprehensive view of the organization’s spending habits. These reports help identify patterns, such as spending volumes at different amounts, which departments or individuals are responsible for the most significant spending, which vendors are frequently used, and the types of goods or services most often purchased. Understanding these details is invaluable for determining appropriate approval requirements.
In addition to analyzing historical data, it’s equally important to anticipate future changes. This means considering upcoming projects, shifts in market conditions, or internal organizational changes that could influence purchasing behaviors. For example, a planned expansion or new product launch might lead to increased procurement in specific categories. Incorporating these future trends into your approval policies ensures that the organization remains agile and prepared, allowing approval workflows to adapt as the organization’s needs evolve over time.
3. Seek Input
Developing effective approval policies involves collaboration with management and others who will be most impacted by the policies. This includes individuals from teams such as purchasing, finance, IT, and legal, who are directly involved in the procurement and approval processes. Their input is vital for creating policies that are not only comprehensive but also realistic in their implementation.
To get their input, it is important to meet with these stakeholders one-on-one and as a group. During these meetings, share the results of your analysis of historical purchasing activity and your understanding of future plans, as this will give context to proposed policies. Present ideas and ask for their thoughts on potential bottlenecks, areas of concern, or ways to streamline the workflow.
By involving stakeholders and incorporating their suggestions and feedback into the policies, you ensure that the policies address real-world challenges and reflects the expertise of those who will be executing them. You also foster greater buy-in, as those involved in shaping the policies will feel more accountable for their success and compliance across the organization.
4. Document Approval Policies
Once risks are identified, data is analyzed, and input is gathered, the next step is to document your approval policies clearly and comprehensively. Well-documented policies provide clarity and ensure that everyone in the organization knows the rules and requirements.
Your approval policies should address who they apply to, the types of purchases covered and approval requirements.
Approval requirements might include:
Minimum number of approvers: The minimum number of approvers required on a purchase regardless of any other factors.
Required approvers: Specific approval requirements for all purchases or based on the nature of the purchase (e.g. IT approvals for technology-related purchases).
Approval limits: Up to what amount do different approvers have authority to approve.
Having clear, detailed approval policies in place reduces ambiguity and promotes transparency throughout the purchasing process. These policies ensure that everyone understands their specific roles and responsibilities. This clarity helps prevent misunderstandings and ensures smooth, compliant operations within the organization.
5. Enforce Approval Policies
The final key to establishing effective approval policies is consistent enforcement as policies are only as good as the organization’s ability to enforce them.
To enforce policies, you should:
Clearly communicate: Ensure that all employees impacted by the approval policies are informed about them. This might involve training sessions, distributing written documentation, or holding informational meetings.
Provide incentives for compliance: Positive reinforcement, such as recognizing departments that consistently follow the policies, can encourage compliance.
Leverage technology: Implement technology solutions that automate approval workflows and make it easier for employees to follow approval policies.
Monitor and review: Review purchasing activity to ensure that approval policies are being followed. Run reports and audit specific purchase transactions to see if there are any issues.
Enforcing approval policies is essential for safeguarding your organization’s assets and ensuring that resources are utilized efficiently and responsibly. By maintaining strict adherence to these policies, companies can minimize risks such as fraud, misallocation of funds, and unnecessary expenditures.
Conclusion
Establishing approval policies and workflows is crucial for maintaining financial control over your organization. By identifying risks, analyzing data, seeking input, documenting policies, and enforcing them consistently, you can create approval policies and workflows that effectively safeguard your organization’s financial health.
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