In the world of procurement, the term “Approval Hierarchy” is a fundamental concept that plays a significant role in the procurement process.

This article aims to comprehensively understand the term, its importance, and its application in procurement, especially for small companies that may not have dedicated procurement departments.

The Approval Hierarchy, in the simplest terms, refers to the sequence of authority within an organization required to approve procurement decisions.

This hierarchy ensures that the right people in the organization have the opportunity to review and approve purchases, thus maintaining control over expenditures and ensuring alignment with the company’s strategic goals.

Understanding Approval Hierarchy

At its core, an Approval Hierarchy is a structured system that outlines who within an organization has the authority to approve certain actions, in this case, procurement decisions.

This system can be as simple or as complex as the organization requires, depending on factors such as the size of the company, the nature of the purchases, and the level of risk associated with the procurement.

For small companies without a dedicated procurement department, the Approval Hierarchy might be straightforward, perhaps involving only the business owner or a senior manager.

However, even in small organizations, it’s crucial to have a clear Approval Hierarchy to ensure accountability and prevent unauthorized purchases.

Benefits Of An Approval Hierarchy

Implementing a well-defined Approval Hierarchy brings several benefits, including:

Clearly Defined Roles And Responsibilities

Each person in the approval chain has a clear understanding of their role in the approval process.

This clarity improves efficiency and reduces confusion, ensuring that the right approver at the appropriate approval level is involved in decision-making.

Streamlined Expense Approval Process

With an established expense approval hierarchy system, companies can streamline their procurement procedures, making approvals quicker and more efficient while maintaining control over spending.

This structured approach minimizes delays by ensuring approval routing follows the correct approval path.

Key Components Of Approval Hierarchies

The Approval Hierarchy is typically composed of several key components:

Approval Levels

Approval levels refer to the different stages in the approval process, with each level requiring approval from a designated individual or group within the organization.

For example, a junior manager may have a limit of $1,000 in purchases, while a senior manager might approve amounts up to $10,000.

Approval Limits

Approval limits are the maximum amounts each approver is authorized to approve.

The approval limits ensure that larger, more significant purchases are reviewed by higher-level executives who have a broader perspective on the company’s strategy.

Approval Request

When a purchase is made, an approval request is submitted to the appropriate approver based on the approval path. This request may include a document for approval, such as a purchase order or expense report.

Sufficient Approval Authority

Each individual within the hierarchy must have sufficient approval authority. This ensures that no one is asked to approve decisions beyond their capacity or the company’s approval procedures.

Implementing An Approval Hierarchy

Assessing Organizational Needs

Before designing an approval hierarchy, assess your organization’s specific needs. Consider the size of the organization, the number of employees involved in procurement, and the typical amounts spent.

This will determine the structure and complexity of the approval workflow.

Designing The Approval Workflow

Once the approval workflow is designed, define the approval steps required for each type of purchase or expense report.

Each approval task should be aligned with the right approval levels to ensure efficiency and compliance with company policy.

Choosing The Right Tools And Technology

Using appropriate tools and technology, such as automated approval features, can help streamline your approval workflows.

Software with automated access approvals and approval routing can track approval status in real time and provide notifications when approvals are pending.

Training Team Members

Effective approval procedures require that all involved parties are properly trained. Team members should understand their approval method, approval rules, and approval status to facilitate a smooth approval process.

Automating Approval Hierarchies

Benefits Of Automation

Automation can significantly improve the speed and accuracy of the approval process.

Tools with automated approval features can send approval email notifications to the relevant approvers, ensuring that all requests are handled promptly.

Automation can also reduce human error and streamline complex approval workflows, such as those involving multiple levels of approvers or different types of documents (e.g., purchase documents).

Popular Automation Tools

Several tools can automate your expense approval management systems, making the approval routing and approval notification processes more efficient.

Popular tools may include automated approval systems or specialized software that integrates with your organization’s purchasing system to create an automatic expense approval hierarchy.

Challenges In Establishing Approval Hierarchies

Resistance To Change

Employees may resist the introduction of a formal approval hierarchy, viewing it as an obstacle to quick decision-making.

Communicating the value of a well-defined approval hierarchy—such as increased accountability and control over spending—is essential in overcoming this resistance.

Maintaining Compliance And Oversight

Even with a well-defined approval hierarchy, it’s crucial to maintain ongoing oversight to ensure compliance with company policies.

Regular audits can help identify deviations and reinforce the importance of adhering to approval processes.

Managing Exceptions And Special Cases

Some situations may fall outside the standard approval rules. In these cases, businesses need to decide how to handle exceptions while maintaining the integrity of the approval hierarchy.

Best Practices For Approval Hierarchies

Regularly Reviewing And Updating the System

Review and adjust the approval hierarchy as your company grows.

As new positions are created or new tools are implemented, adjustments may be needed to reflect the changing structure of your organization.

Encouraging Communication And Feedback

Encourage open communication between approvers and those submitting requests to improve the approval process. Feedback can help refine the approval workflows and ensure that the process remains efficient.

Utilizing Data-Driven Insights

Use data from expense approval management systems to identify bottlenecks or inefficiencies in your approval workflows.

Analyze trends in approval tasks and approval procedures to make informed decisions about process improvements.

Conclusion

In conclusion, an Approval Hierarchy is a critical element of procurement, especially for companies looking to control spending, enhance accountability, and streamline their procurement process.

By defining approval limits, and approval levels, and automating approval workflows, businesses can maintain a more efficient and transparent process for all involved.

Whether you’re establishing a company expense approval hierarchy for the first time or refining an existing structure, ensuring that all team members understand their roles and responsibilities within the approval path will set the foundation for a successful procurement operation.