Build a better purchase order approval workflow (and P2P process)
Are you fully optimizing your purchase order approval process?
Faced with rising costs, increasing process complexity, and rapidly evolving supply chain risks, finance leaders are seeking tighter control and oversight of purchasing workflows. The trend toward decentralizing purchasing adds another layer of complexity: managing spend without direct involvement in every transaction.
Optimizing purchase order (PO) approval workflows effectively addresses this challenge. It provides the visibility and control needed in a decentralized purchasing environment. A well-designed approval workflow ensures financial control while maintaining the flexibility your organization needs to operate efficiently. The key is finding the right balance. Overly restrictive approval policies can reduce agility, while unchecked spending exposes your business to financial risk.
This article helps you find that perfect harmony. We break down each step of the PO approval workflow and share best practices to help you optimize your existing processes.
We’ll start with an overview of the approval process.
Steps of the purchase order approval process
The purchase order approval workflow comprises four steps:
- PO creation and submission
- Routing the PO to the appropriate approver(s)
- PO review and approval/rejection
- Issuing PO to vendor
Let’s break these out.
Step 1: Purchase order creation and submission
The PO approval workflow starts when an employee submits a purchase requisition. Once the requisition is reviewed and approved, the purchasing department creates a PO to initiate the purchase. The PO contains details such as the vendor name, items and services being purchased, and payment terms.
Once they complete the PO, the purchasing department submits it to the appropriate approver (or approvers) for review.
Step 2: Routing the PO to the appropriate approver(s)
The completed PO is routed to the appropriate approvers for review and sign-off. The routing logic can be based on one or more different criteria, including the following.
Budget availability
POs are routed to the approver responsible for the budget associated with the purchase. For example, a PO for a truck purchase would be routed to the company’s fleet manager to ensure the purchase is within the fleet budget.
Dollar amount
POs are routed to approvers based on the PO value. For example, all POs under $10,000 could be routed to department heads for approval, while POs above $100,000 might be routed to the CFO..
Department or cost center
POs are routed based on the department or cost center incurring the expense. For example, a PO from a marketing manager for promotional material would go to the director of marketing for approval.
Vendor
POs going to specific vendors may require additional scrutiny before they are issued. For example, a PO to buy a product from a direct competitor may require CEO approval.
Project
POs tied to projects may be routed to the project sponsor for approval to track and control project costs.
Item category or type
Certain types of purchases might require specific approvals. For example, a hospital may require all medication purchases to be reviewed and approved by the head pharmacist.
Once an approver receives a PO, the review and approval process begins.
Step 3: Reviewing and approving/rejecting the PO
After receiving a PO, the approvers review the details to make sure they’re accurate and that the purchase is within budget, adheres to company policies, and is aligned with business needs. They may request additional documentation — such as a vendor quote, contract, or business case — to support the purchase.
If everything is in order, the approver approves the PO and returns it to the purchasing department so it can be issued to the vendor. If there are problems with the PO, they reject it and return it to the purchasing department, providing clear reasons for the rejection. The purchasing department may then revise and resubmit the PO or cancel it if necessary.
Step 4: Issuing PO to vendor
Once the approvers sign off on the PO, the purchasing department issues the approved PO to the vendor. The vendor acknowledges receipt of the PO, confirms they accept the terms, and delivers the product or service. Finally, the purchasing department stores the PO and related documentation for future reference and audit purposes.
The benefits of having a purchase order approval workflow
A well-designed purchase order approval workflow helps you manage and control costs and financial risks. It gives you clarity and oversight at each step to ensure you know what you’re spending and what you’re spending it on, delivering four core benefits.
1. Greater financial control
Organizing your PO approval workflow helps prevent unauthorized purchases, enforces budget adherence, and minimizes overspending and shadow spend.
2. Improved policy compliance
Better visibility and control over PO approvals ensures expenditures meet internal policies and regulatory requirements and helps you maintain a complete procurement audit trail.
3. Risk mitigation
A solid PO approval workflow minimizes occupational fraud and human error and reduces financial risk. By facilitating clear communications with vendors, it also reduces the risk of incorrect purchases or billing errors.
4. Spend visibility
By reviewing and approving every transaction, a PO approval workflow provides insights into spending patterns, letting you make data-driven decisions about budgeting and forecasting.
With these benefits in mind, let’s look at best practices for optimizing your workflows.
Best practices for optimizing PO approval workflows
Achieving the benefits of a well-designed PO approval workflow requires careful and targeted optimization of your existing purchase-to-pay (P2P) processes. Here’s how to achieve that.
Develop an approval hierarchy
Establish a clear approval hierarchy for who is responsible for approving POs at each stage. Use the criteria from Step 2 above to create the routing logic.
For example, a simple hierarchy might include:
- Level one: Employees/supervisors for purchases under $5,000
- Level two: Department heads/budget owners for purchases under $10,000
- Level three: Finance department for purchases under $100,000
- Level four: CEO/CFO for purchases over $100,000, or exceptions such as purchases from competitors.
Ensure the approval authority is clearly communicated and approvers have the information to make informed decisions.
Document PO policies and procedures
Begin by documenting your existing PO process from purchase requisition to issuing POs to vendors. Be sure to include these elements:
- Stakeholder roles and responsibilities: Who is responsible for creating, reviewing, and approving POs?
- Approval hierarchy: Include your routing logic and approval authority levels.
- Required documentation: What information do approvers need to verify the purchase details?
- Exception handling procedures: How should exceptions like very large purchases or purchases from unvetted suppliers be handled?
All employees involved in the PO process need to understand and have access to the policies and procedures. Make the document easily accessible via the company intranet, knowledge base, or training material.
Regularly review and update processes
Periodically review your PO approval process to ensure it’s current. Update your procedures to reflect changes in:
- Business needs and priorities
- Spending thresholds
- Approval authority levels
- Organizational structure
- Technology and automation capabilities
- Approved vendor lists
- Regulatory and tax requirements
Gather feedback from employees and vendors to identify and address bottlenecks and pain points. For example, if low-value purchase requests are overwhelming approvers, consider raising the threshold for POs requiring their approval. This allows lower-level employees to approve smaller purchases, freeing up senior approvers’ time.
Track key performance indicators (KPIs)
Monitor KPIs such as PO processing cycle time, approval rates, and error rates to assess the efficiency and effectiveness of your approval workflows. Use the data to identify areas for improvement or make tweaks to your routing logic and approval hierarchies.
Leverage PO process automation
Implement a financial automation or P2P automation platform, or integrate PO management functionality into your existing ERP system, to significantly optimize your PO approval workflows. Here’s how automation helps.
Streamlined approval workflows
Automation eliminates paper-based processes and manual PO data entry and handoffs. This improves processing efficiency and reduces errors, leading to faster, more accurate approvals and lower costs.
Automated approval routing
You can configure P2P software to automatically route POs to the appropriate approvers based on your routing hierarchy. This ensures that POs reach the right people, preventing delays and avoiding unauthorized spending. Automation solutions can also remind approvers of pending POs in their approval queue to speed up the approval process.
Improved visibility and tracking
Automation platforms with reporting and analytics tools give real-time insights into PO activity, spending, and process performance. This enhanced visibility makes it easy to identify bottlenecks and proactively forecast and manage future spending.
You now have a solid understanding of the PO approval workflow and the best practices for optimizing it. But putting this knowledge into action can be challenging without the right tools.
That’s where Stampli comes in.
Billy for PO Matching is the gamechanger
Unlike other financial automation tools, Billy has a decade of training on real-world purchase order and financial data.
The result? It reasons like a real, human financial professional.
BIlly, your AI employee understands the full business context of your purchase orders. That means it can go beyond basic line-item matching to handle the complex realities of your actual business.
Different item description text? Split deliveries? Typos? Discrepancies?
Billy can handle it.
Across Stampli customers, we’re able to match POs with over 97% accuracy—and improving!
What used to take your finance team days to manually process is matched in minutes. You’ll never have to worry whether Stampli can handle it or whether it’ll just be faster to just have a human do it instead.
“The AI and matching ability takes such a workload off of our employees,” explained one Stampli customer. “Having most of that done for you allows for more people to have more time in their day to focus on other tasks. With the amount of invoices that we have, every minute can count in closing.”
And that’s how Stampli helps finance teams make a bigger impact. Stampli customers report saving 30-35 hours per week by automating tedious and time-consuming manual work like PO matching. That’s time they can now use to focus on the bigger picture, thinking strategically and growing the business.
Stampli: Connecting every dot for procure-to-pay
Existing procurement solutions promise complete control, but they create gaps. Their incomplete solutions leave procurement teams struggling to build workarounds between disconnected systems and communicate effectively using email, chat, and meetings. The result is compromised control, poor visibility, and endless inefficiencies.
Stampli is a unified procure-to-pay platform that connects every element of the workflow, from procurement and payables to payments and vendor management, in one adaptable, AI-powered system.
- Procurement
- Accounts payable
- Payments
- Vendor management
- Internal and vendor messaging
- Documents and contracts
- Your ERP
Here’s just the start of how Stampli can help you optimize your PO approval workflows, and every other aspect of your P2P processes:
- Billy for PO Matching delivers unmatched accuracy and reasoning
- Dynamic adaptive workflows that mirror your unique processes
- Built-in messaging keeps every conversation connected to the transaction
- Swift ERP sync in weeks, not months
- Intuitive portal supporting all purchase requests
- Dynamic and fixed approval workflows
- Real-time budget tracking and validation
- Intelligent request handling based on any criteria, like request value, type, or department
Stampli includes Billy, your AI employee, an intelligent system that operates approvals, manages purchase requests, and continuously learns to eliminate manual work.
Experience Stampli Procure-to-Pay today to see how Stampli redefines procurement processes!
Frequently asked questions (FAQ)
What is the PO approval process?
The PO approval process is a structured workflow that ensures purchase orders are reviewed and authorized before being sent to vendors. It typically involves four key steps:
- Creating and submitting the purchase order
- Routing it to the appropriate approver(s) based on criteria like dollar amount, department, or vendor
- Reviewing and approving or rejecting the PO
- Issuing the approved PO to the vendor. This process provides financial control, ensures policy compliance, and creates visibility into organizational spending.
How do you check PO approval flow in SAP?
In SAP, you can check the PO approval flow by accessing the purchase order document and viewing its release strategy or approval workflow. Navigate to transaction code ME23N (Display Purchase Order), enter the PO number, and check the “Release Strategy” tab to see the approval path and current status. You can also use transaction code ME28 to display the overall release status of multiple purchase orders. However, many organizations find that dedicated P2P automation platforms like Stampli provide more intuitive visibility and real-time tracking of approval workflows across all their systems, not just SAP.
How does Stampli improve the purchase order approval workflow?
Stampli streamlines PO approval workflows through intelligent automation and AI-powered matching. The platform automatically routes purchase orders to the right approvers based on your established hierarchy, sends reminders for pending approvals, and provides real-time visibility into the status of every PO. Billy can match POs with over 97% accuracy, handling complex scenarios like split deliveries and description discrepancies. This helps finance teams save 30-35 hours per week while maintaining complete control over the approval process.
