Purchase Approval Process: What It Is and How to Set It Up
Learn about how to build an effective purchase approval process and why purchase approvals are a critical part of procurement.
Procurement is necessary for many important business tasks like hiring contractors, buying software and equipment, and paying vendors. Even so, many organizations struggle with procurement because they lack efficient purchase approval workflows.
Read on to learn more about what the purchase approval process is, why purchase approvals are a critical part of procurement, and some tips for streamlining the process.
What Is a Purchase Approval Process?
Purchase approval is a workflow for validating orders and moving them forward for fulfillment. They're necessary because businesses need to carefully track and control spending. After all, it’s easy to lose track of how different departments are allocating capital, especially in large organizations with hundreds or thousands of workers.
In addition, purchase approvals create legally binding agreements between buyers and vendors. This is necessary for green-lighting service contracts and executing critical tasks.
To illustrate, a business might outsource a critical process like marketing support to a third party. Signing a purchase order ensures that both sides agree to the contract. This prevents legal disputes and enables both sides to move forward with the agreement.
Who Makes Business Purchase Decisions?
In most organizations, multiple individuals have a hand in business purchase decisions. Approvals may involve users, purchasing managers, directors, and executives.
Some organizations empower low-ranking employees to approve purchases, while others require executive leaders to approve all orders. Approval workflows largely depend on the size of the business, the industry, and the organizational structure.
How a Purchase Order Approval Process Works
Companies tend to have different processes for managing purchase approvals. With that in mind, here's a general overview of how purchase approvals work at many organizations.
1. A business unit issues a request
First, a business unit issues a request for purchase by filling out a purchase order form. In some cases, there may be an approved list of vendors that the business asks the employee to choose from. In this case, those vendors have already gone through a thorough review and the process can be expedited.
Small businesses might have different policies governing how employees can submit purchase order requests. But as company grows, having a standardized process to manage purchase approvals is vital to ensuring fast decision making.
This approach typically makes it easier to process and automate incoming requests. In addition, it often assists in eliminating missing information, which can lead to delays.
By automating the purchase approval process, employees can see exactly what they need to provide to complete each order, resulting in faster and easier processing.
2. The procurement team analyzes the request
Once the purchase order comes through, the procurement team analyzes the request.
During this process, procurement reviews the request to make sure they have all the information they need to make a decision. For example, the team might inspect the order for critical information such as proof of business insurance. They also might spend some time ensuring that the order comes from a registered or certified entity.
If this is a new vendor, a more advanced vetting process may be deployed. For example, if your company is selecting a new customer relationship management (CRM) application, a security and privacy review might be an important part of the decision-making.
3. A Request for Proposal (RFP) is Created and Sent to Prospective Vendors
Often, a company will develop an RFP, which outlines the requirements of the project or service. Your company may already have an approved list of vendors they’d prefer to work with. In that case, the RFP would be sent to those vendors, and the vendor would review the requirements and send back a response that includes pricing. If this is a newly defined company need, there might not be existing vendor relationships, in which case a vendor approval process would be initiated.
4. Procurement Approves or Denies the Request
After reviewing the purchase order, the procurement team either approves or denies the request.
If the procurement team denies a request, they typically send it back detailing why the purchase order did not receive approval. Procurement typically details what they need to approve the request, and they may also issue a deadline for returning the order.
If procurement approves a request, they usually forward it to key decision makers for final sign off.
5. Issuing the PO
Once all approvals have been collected, a purchase order (PO) is issued. The PO contains a number that is referenced in billing, which allows finance to match a vendor payment with the approved spend allocation.
The Benefits of Having a Purchase Approval Process
Setting up a purchase approval process may seem like an unnecessary barrier. But it’s a critical step for controlling business processes and ensuring compliance spending. Here’s why.
Obtaining purchase approval at the beginning of a project saves time by immediately creating organization alignment. approval at the onset of a contract prevents future complications that could lead to contract termination or other problems.
To illustrate, the procurement team may discover early on that a potential vendor lacks critical security or industry compliance. Discovering this insight early gives the vendor time to either obtain the necessary clearance or avoid starting a contract they can’t fulfill.
Another benefit to establishing a purchase approval process is that it improves efficiency and eliminates confusion.
For example, it’s possible to automate routing so that incoming purchase orders always go to the proper individuals. If you use a platform like Slack, you can set up notifications to ensure team members receive incoming messages and take action. This prevents backlogs from occurring.
Companies typically run into trouble when they have no visibility into major purchases. Setting up an approval process improves transparency, which helps with auditing and compliance. This makes it easy for decision makers and auditors to see exactly how different teams are spending money. They can also potentially participate in the decision-making process if they so choose.
"Setting up an approval process improves transparency, which helps with auditing and compliance. This makes it easy for decision makers and auditors to see exactly how different teams are spending money. They can also potentially participate in the decision-making process if they so choose."
How to Set Up a Purchase Approval Process
There are many ways to set up a purchase approval process. Use the following steps to establish a general direction for your company.
1. Analyze your current workflows
The first step is to take a look at your company’s current purchase approval process and determine what’s working and what needs improvement.
If your business is still using manual, spreadsheet-style approvals, it’s a good opportunity to consider automation. By automating approvals, you can reduce manual input errors and expedite decision making.
2. Pick a platform
Next, determine what type of approval process is right for your needs. While some companies still use email, many are now turning to SaaS-based purchase order software for more control over the process.
You can also use a platform like Wrangle to automate purchasing approval workflows, which brings approvals directly to your company’s Slack workspace. This is a great option because it’s safe and convenient for team members who are already using Slack to communicate every day.
3. Determine what information you need
It’s also necessary to determine what information you need to ask for on your purchase approval forms.
Your company may be able to set up a single process order form that all teams can use. However, some departments, like IT or finance, may require specific questions that require input from department leaders.
As a best practice, it’s a good idea to run your purchase approval forms by internal team members to ensure they're accurate and in line with industry standards.
4. Set up an approval hierarchy
In order to process purchase approvals, you need to establish an approval hierarchy. In other words, there should be a process in place that all team members need to follow.
Keep in mind that some low-level approvals may not require executive input. Trusting team members to handle certain approvals can save time and lead to faster decision making.
5. Monitor and optimize your workflows
The final step is to monitor your approvals and optimize them for maximum efficiency.
During this process, you may want to set up KPIs like average approval time, missed approvals, and successful approvals. Using that information, you can continue optimizing your process over time.
Automating the Purchase Approval Process
Many companies use Slack for internal and external communication. Slack is great for automating purchase approvals, but without the right tools in place, handling requests can be tricky. It typically requires folks to nag colleagues for information and babysit multiple channels. In addition, there’s no way to track status updates.
Wrangle solves these problems by automatically assigning approvals and tasks. You can build powerful workflows that are delivered in Slack for approval chains like procurement. This leads to faster approvals—and fewer missed communications. Let’s walk through how you could automate the process we outlined above.
Setting up purchase approval process as an automated workflow
First, let’s start by adding Wrangle to your Slack workspace.
Next, we’re going to build a purchase approval process workflow in the Wrangle web application. When we’re done, this workflow will be accessible in your company Slack channels. To get started, hit the “create workflow” at the top right of the screen.
Now, you have some options. You could create a workflow from scratch. But Wrangle has lots of templates. You’ll find a purchase approval process template in the gallery. Let’s use that one.
As you’ll see below, our template already has several steps for your purchase approval. You can edit any of the steps in the default template and add your own. For example, if you needed to add a security or privacy review, simply add that to the workflow. For today, we’ll stick with the standard template.
The intake form is the first step of your purchase approval process. From here, your users will enter a PO number, the name of their vendor and attach any relevant documentation. Remember, this is simply the design phase. When launched, this process will be accessible in Slack.
Each step in our purchase approval workflow requires different managers to approve. Let’s take a look at the Manager PO Approval.
You can see that Wrangle has already named all of these steps in the template. Now, we need to make a couple of decisions. Winston is the manager responsible for approving this PO, so let’s select him from our list of Slack members. We also decided which Slack channel we want to use, which in this case is finance-procurement. We could also remind assignees, or use the run this step only under certain conditions, which allows us to add conditional logic.
Next, we need to decide who in legal should approve. We generally work with Lucas on our legal team, so we’ll assign him to approve these requests. We’ll keep the conversation going in the finance channel, but if we wanted, we could have Lucas’ approvals go to the legal Slack channel.
Once legal approval, we’re ready to get the PO generated from the finance team. We created a task list to manage the creation.
And of course, we have to pay our bills. The final step in our purchase approval process is to ensure goods have been received, match the invoice, pay it and when appropriate, close the PO in our finance system. Wrangle has a task for each, and we can assign them to the relevant team members that will handle the requests in Slack.
So, now we’ve created our workflow. We simply click save and mission accomplished. Your new purchase approval process is available to your team in Slack.
This post was written by Justin Reynolds. Justin is a freelance writer who enjoys telling stories about how technology, science, and creativity can help workers be more productive. In his spare time, he likes seeing or playing live music, hiking, and traveling.
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