The essential guide to purchase order approvals & workflows

A Purchase Order (PO) Approval Process is a formalized sequence of steps that an organization follows to solicit, review, and approve purchases from vendors. This process is integral to ensuring that purchasing decisions align with organizational objectives, financial guidelines, and compliance requirements.

For fast-growing companies, the significance of a PO approval process cannot be overstated. As organizations scale, so do their expenses and complexities. A well-defined approval process not only brings financial discipline but also enhances visibility into spending, making audits simpler and helping to avoid unnecessary expenditures.

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This comprehensive guide aims to cover everything you need to know about the PO approval process, from its basic definition and importance to PO automation. Whether you're looking to build a robust approval process from scratch or streamline an existing one, this guide has got you covered.

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What is Purchase Order Approval?

A Purchase Order Approval is the important step within the procurement process in which a purchase order undergoes formal review and validation before it is sent to the supplier. This process often involves multiple layers of scrutiny, including checks by the procurement team, finance department, and occasionally, upper management.

The significance of this procedure in business operations cannot be overstated. It serves as a checkpoint that ensures every expenditure aligns with both the operational needs and the financial goals of the organization. Failing to institute an effective approval system can result in misaligned purchases, budget overflows, and even regulatory non-compliance—issues that could escalate into financial and reputational crises for the company.

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Difference Between a PO Approval and a PO Workflow

While they are interrelated, it's crucial to distinguish between a PO Approval and a Purchase Order Workflow.

PO Approval

This is a single but pivotal step in the purchasing process, where the purchase order is examined and either approved or denied based on predefined criteria such as budget constraints, necessity, or supplier reliability.

PO Workflow

This term refers to the entire life cycle of a purchase order, from the initial requisition to final payment. The approval is just one stage within this broader framework. A well-designed workflow will include multiple stages such as requisition, approval, order delivery, three-way match (between PO, delivery receipt, and supplier invoice), and finally, payment.

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How Does a Purchase Order Approval Process Improve Purchasing?

The benefits of a structured Purchase Order Approval Process are multi-fold and directly contribute to organizational efficiency and financial health.

Budget Control

The most immediate benefit is budget control. By standardizing the process for purchasing goods or services, companies can more easily track and manage expenses against budgetary guidelines. The approval steps ensure that every expense is pre-validated against available funds, reducing the risk of overspending.

Increased Visibility on Spending

A PO approval process adds multiple checkpoints that provide real-time visibility into company spending. This transparency is essential for any organization but becomes even more important as a company scales and expenses grow in complexity. With an automation PO approval solution, like Zip, companies can oversee 100% of their external spending. 

Simplified Audits

When the time comes for financial audits, a well-defined PO approval process proves invaluable. All transactions have a clear, documented trail, making it easier to comply with financial regulations and accountability standards. Auditors can quickly verify the legitimacy of purchases and the adherence to internal policies, thereby speeding up the auditing process.

Limitations of a Manual Process

While the importance of a PO approval process is clear, a manual approach can be fraught with challenges. Manual processes are labor-intensive, slow, and prone to human error. This can result in delays, inaccuracies, and even compliance risks, especially when scaling at a high growth rate. 

Pitfalls of Using Legacy Enterprise Software

Some organizations opt for legacy enterprise software to manage their PO approval process, but this choice comes with its own set of problems. These platforms often have steep learning curves and may not be flexible enough to adapt to the evolving needs of a fast-growing company. Moreover, legacy systems often lack integration capabilities, creating data silos that hamper visibility and efficiency. 

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Setting Up a Purchase Order Approval Workflow

Information Required to Create the Workflow

Creating a robust Purchase Order Approval Workflow necessitates thorough preparation and comprehensive information gathering. Here are the data points you'll need:

Different Spend Categories

Identifying various spend categories—like office supplies, IT hardware, professional services—will allow you to tailor approval processes for different types of purchases.

Average Spend Amount

Knowing your average spend per purchase or per category enables you to establish different approval tiers, making the process more efficient and adaptable.

Approval Hierarchy

Outline the hierarchy of individuals involved in the approval process. This could range from immediate supervisors to department heads, the finance department, and even C-level executives for larger spends.

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Steps Involved in the Workflow 

Identifying Internal Needs

The first step involves recognizing the need for a particular product or service. The originating department specifies what is required, the quantity, and the desired delivery timeline.

Procurement Review

Once a need is identified, the procurement department reviews the request to start the sourcing process. They may compare suppliers, negotiate contracts, and ensure the desired goods or services align with the budget.

Purchase Approval

This is where the PO Approval comes into play. Based on the gathered data, appropriate parties review and either approve or reject the purchase. This step might involve one or more layers of scrutiny depending on the spend amount and the organizational hierarchy.

Creating the Purchase Order

Upon approval, a formal purchase order is created, detailing the terms, conditions, and particulars of the buy.

Vendor Approval

The PO is sent to the vendor, who then confirms receipt and terms, marking their acceptance of the order.

Receiving Goods

Once the goods or services are delivered, their receipt needs to be documented, initiating the verification process to ensure what was ordered matches what was received.

Invoice Processing

The final step involves reconciling the received goods or services with the vendor's invoice. Once the three-way match (PO, delivery receipt, and invoice) is confirmed, the finance department processes the payment.

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Example of a Purchase Order Approval Process

Understanding the Purchase Order Approval Process becomes simpler when we break it down into a real-world example. Let's take a growing tech startup as our case study.

Scenario

The IT department at TechStart Co. needs to purchase 50 new laptops for its expanding team. How does the company navigate this significant spend while maintaining budget control and operational efficiency?

Step 1: Identifying Internal Needs

The IT manager identifies the need for new laptops and fills out a purchase request form, specifying the specifications, quantity, and urgency.

Step 2: Procurement Review

The purchasing department reviews the request, compares quotes from three different suppliers, and confirms the most cost-effective yet quality option.

Step 3: Purchase Approval

The approval request goes to the department head for initial approval. Due to the large sum, it then escalates to the finance or purchasing department and finally to the CEO for ultimate approval.

Step 4: Creating the Purchase Order

A PO is created, detailing the terms and conditions, total cost, and delivery timeline.

Step 5: Vendor Approval

The PO is sent to the vendor. They confirm the terms and acknowledge the receipt of the order.

Step 6: Receiving Goods

The laptops are received by the IT department, which verifies that the goods match the PO specifications.

Step 7: Processing Invoice

The finance department receives the invoice and conducts a three-way match between the PO, the delivery receipt, and the invoice before processing payment.

By understanding and carefully implementing these steps, your organization can construct a Purchase Order Approval Workflow that not only improves efficiency but also enforces financial discipline and compliance. In a rapidly evolving business landscape, having a structured purchasing workflow can be your linchpin for operational success. For more insights, check out our complete guide on purchasing workflow.

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Best Practices for Creating a Purchase Order Approval Workflow

Creating an efficient Purchase Order Approval Workflow demands more than just lining up a series of steps. To fully capitalize on the process's transformative potential, organizations should consider adopting certain best practices. Here are some recommendations:

Create Monetary Tiers for Different Levels of Scrutiny

One size does not fit all when it comes to purchase orders. Implementing a tier-based approach for different levels of spend can improve workflow efficiency.

• Up to $1,000: Only department head approval needed.
• $1,000 to $5,000: Department head and finance team approval.
• Over $5,000: Department head, finance, and executive approval.

By categorizing purchase orders this way, you reduce bottlenecks in the process, and the right people approve the right expenditures at the right time. PO automation software, such as Zip, enables teams to create purchase order workflows for any need. 

Advantages of Team-Based Approval Hierarchies

Traditional hierarchies often slow down the approval process, but a team-based approach can make it more agile. A collective decision-making strategy distributes responsibility and enables a more nuanced approval process.

• Faster Approval: Multiple team members can review a PO simultaneously.
• Reduced Risk: Collaborative scrutiny minimizes errors and omissions.
• Transparency: Team-based processes often use shared platforms that make it easier to track changes and approvals.

Other Tips for Streamlining the Process

Automate Where Possible

Automation tools can perform three-way matches and other validation checks, drastically reducing the time taken for these activities.

Set Clear Guidelines

Ensure that every team member understands their role in the process, as well as what’s expected of them at each stage.

Regular Audits

Perform monthly or quarterly audits to ensure compliance and identify areas for improvement.

By incorporating these best practices into your PO Approval Workflow, you’re not just streamlining operations—you’re also setting the stage for scalable growth, better financial oversight, and an organizational culture that values transparency and accountability.

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Common Mistakes to Avoid

Even with a well-structured Purchase Order Approval Workflow, pitfalls can emerge that stymie effectiveness and efficiency. Being aware of these common mistakes can be half the battle in avoiding them.

Lack of Documentation

Omitting to document approvals, changes, or exceptions in the workflow can lead to conflicts, compliance issues, and financial inaccuracies. Make documentation a non-negotiable step in every phase of the process. Use digital records where possible for easy retrieval and audit trails.

Over-Reliance on Manual Approvals

Manual approval processes are not only time-consuming but prone to human error. Automate as much of the approval process as possible. Automated workflows can flag anomalies, manage three-way matches, and simplify the approval hierarchy.

No Plan for Exception Handling

Without a plan for how to handle exceptions or urgent requests, the PO process can get bogged down, delaying time-sensitive projects. Build a fast-track approval process for exceptions that are still robust enough to ensure due diligence.

Inadequate Training

Team members who don’t fully understand the process or their role in it can make costly mistakes. Comprehensive training should be a prerequisite for anyone involved in the PO approval process. Frequent refreshers and updates should also be scheduled.

Absence of Regular Audits

Without regular audits, you may not identify a systemic issue until it has become a major problem. Implement regular audits to catch errors, assess compliance, and evaluate the overall health of your PO process.

By being aware of these common mistakes and taking proactive steps to avoid them, you are not just fixing a process; you're building a more resilient, transparent, and agile organization.

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Automate Your Purchase Order Approval Workflow with Zip

The modern business landscape demands agility, efficiency, and robust compliance mechanisms. While implementing a PO Approval Workflow has its merits, the true game-changer is automation. Let's dive into how Zip can elevate your purchasing game to the next level.

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Benefits and Challenges of Automation

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Benefits

Time-Saving

Automated processes dramatically reduce the time spent on approvals, freeing up employees for more value-added tasks.

Error Minimization

Automation eliminates the possibility of human errors, thereby increasing the accuracy of the PO process.

Compliance and Audit Trails

Automated systems create seamless documentation at each stage, simplifying compliance and audits.

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Challenges

Initial Setup

Integrating automation requires an upfront investment of time and resources.

Change Management

Switching to a new system can face resistance from employees accustomed to older methods.

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Zip’s Unique Features

Automated Stakeholder Alignment

Zip provides automated routing to ensure the right stakeholders review each purchase, depending on the parameters set, such as price or vendor.

ERP Integration

Seamless integration with existing Enterprise Resource Planning (ERP) systems ensures that data flows efficiently between platforms, avoiding manual data entry.

Flexible Approval Chains

Zip allows you to customize your approval chains based on a myriad of variables like department, amount, or vendor, making it easier to adapt to your unique business needs.

No-Code Solutions

No need to invest in costly and time-consuming custom coding; Zip offers ready-made templates and no-code solutions for quick implementation.

Automation is not just a fad; it's an imperative for modern businesses that wish to stay competitive and compliant. Zip offers a versatile and powerful solution that makes the transition to automated PO approvals seamless and rewarding.

By embracing Zip's automated solutions, you're not just installing a tool; you're adopting a more streamlined, transparent, and robust approach to purchase order management. Check out a demo today.