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 provide a comprehensive understanding of the term, its importance, and its application in the procurement process, 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 that is 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 organization, 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 quite 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.

Components of an Approval Hierarchy

The Approval Hierarchy is typically composed of several key components. First, there are the approvers themselves – these are the individuals who have been granted the authority to approve purchases. The approvers are usually senior members of the organization, such as managers or directors, who have a thorough understanding of the company’s strategic objectives and budgetary constraints.

Second, there is the approval limit. This is the maximum amount that each approver is authorized to approve. For example, a junior manager might have an approval limit of $1,000, while a senior manager might have a limit of $10,000. The approval limit ensures that larger, more significant purchases are reviewed by higher-level executives who have a broader perspective on the company’s overall strategy and finances.

Importance of a Well-Defined Approval Hierarchy

A well-defined Approval Hierarchy is crucial for several reasons. First, it ensures accountability. By clearly outlining who has the authority to approve purchases, the Approval Hierarchy helps prevent unauthorized spending. This is particularly important for small companies, where even a single unauthorized purchase can have a significant impact on the bottom line.

Second, a well-defined Approval Hierarchy helps maintain control over the procurement process. By requiring that purchases be approved by the appropriate individuals, the Approval Hierarchy ensures that procurement decisions are aligned with the company’s strategic objectives and budgetary constraints.

Implementing an Approval Hierarchy

Implementing an Approval Hierarchy in a small company without a dedicated procurement department can be a straightforward process. The first step is to identify the individuals within the organization who will serve as approvers. These should be individuals who have a thorough understanding of the company’s strategic objectives and budgetary constraints.

Once the approvers have been identified, the next step is to establish the approval limits for each approver. These limits should be based on the individual’s role within the organization and their understanding of the company’s finances. For example, a junior manager might have a lower approval limit than a senior manager.

Challenges in Implementing an Approval Hierarchy

While implementing an Approval Hierarchy can be relatively straightforward, there can be challenges. One common challenge is resistance from employees. Some employees might view the Approval Hierarchy as a form of micromanagement or a lack of trust. It’s important to communicate clearly with employees about the purpose of the Approval Hierarchy and how it benefits the company as a whole.

Another challenge can be determining the appropriate approval limits. Setting the limits too low can slow down the procurement process, as more purchases will require approval from higher-level executives. On the other hand, setting the limits too high can increase the risk of unauthorized spending. It’s important to strike a balance that maintains control over spending while also allowing the procurement process to proceed efficiently.

Managing an Approval Hierarchy

Once an Approval Hierarchy has been implemented, it’s important to manage it effectively. This involves regularly reviewing the hierarchy to ensure that it’s still appropriate for the company’s needs. For example, as the company grows, it might be necessary to add more approvers or adjust the approval limits.

Managing an Approval Hierarchy also involves monitoring the procurement process to ensure that the hierarchy is being followed. This can involve regularly reviewing procurement records to check for any unauthorized purchases or other irregularities.

Tools for Managing an Approval Hierarchy

There are several tools available that can help manage an Approval Hierarchy. These include procurement software that can automate the approval process, sending notifications to approvers when a purchase requires their approval and tracking the approval process to ensure accountability.

Another useful tool is reporting software that can generate reports on the procurement process. These reports can provide valuable insights into spending patterns, helping to identify any potential issues or areas for improvement.

Conclusion

In conclusion, an Approval Hierarchy is a crucial component of the procurement process, even for small companies without a dedicated procurement department. By clearly defining who has the authority to approve purchases and establishing appropriate approval limits, an Approval Hierarchy helps maintain control over spending, ensure accountability, and align procurement decisions with the company’s strategic objectives.