Whether hiring contractors, buying equipment or paying vendors, many businesses struggle with the procurement process. Here are some tips for streamlining your company’s purchase order (PO) approval process. 

Benefits of a Formal Workflow

POs create legally binding agreements between buyers and vendors. For example, your business might outsource a function, such as payroll or marketing, to a third party. A systematic approval process helps your business track and control its spending. 

PO approvals may involve users, purchasing managers and executives. Some companies allow low-level employees to approve orders, but most have controls in place that require managers or executives to approve orders over a predetermined dollar amount. 

It’s important to use a formal order approval process. Approving orders upfront helps prevent contract disputes and terminations. For instance, the procurement team may discover early on that a potential vendor lacks critical security or industry compliance to fulfill a contract. It also helps decision-makers and auditors understand how business units are spending money. If your business has a standardized, automated approval process, it can eliminate missing information and minimize delays. 

Steps in the Approval Process

The approval process should start with a PO request from a business unit for specific goods or services. Often, the procurement department provides a list of approved vendors that have already been vetted and have agreed to favorable pricing. If the employee selects a preapproved vendor, the approval process generally is expedited. 

After the PO request form has been completed, it goes to the procurement department. The team reviews the request to make sure they have all the required information. Approved vendors submit a price based on the requirements. New vendors will be vetted by the procurement team. Additional information — such as proof of insurance or tax identification numbers — may be required for orders from new vendors. In some cases, a request for proposal (RFP) that specifies the requirements of the service or project may be sent to the vendor. 

Once all the required information has been collected, the procurement team will either approve or deny the request. Denied requests should provide an explanation, including what additional steps are needed for approval, and a deadline for returning the request. Approved requests are sent to final decision makers for their sign-off. Then a PO is issued with an assigned number. 

When goods are delivered and inspected, the receiving department will match the PO number to the bill of lading. And the payables department will match the PO number to the vendor’s invoice and voucher to properly record the order in the accounting system. This workflow helps ensure that spending complies with the PO approval process, invoices aren’t paid twice or overlooked, and costs are allocated to the correct business unit. 

Vetting Your Process

Has your business outgrown its existing PO approval process? Some startups can get by with manual spreadsheet approvals. But, as your business grows, you may decide to automate the process using a software-as-a-service (SaaS) program. Doeren Mayhew's audit and assurance pros can help evaluate your current procedures and set up performance metrics, such as average approval time and the percentage of denied requests, to determine areas for improvement.