Invoice Approval Process Best Practices to Modernize Your Accounts Payable
August 13, 2020
Estimated reading time: 3 minutes
We surveyed over 200 accounts payable professionals, and found that they spend 20% of their time managing approvals. Spending one in five days of the week following up on colleagues for sign-off is not only an inefficient use of resources, it can be frustrating and cause issues between departments.
Why is this the case? AP approval channels are either poorly defined or lack the technology to be managed effectively. This leaves organizations more vulnerable to fraud and abuse. For example, this Oregon employee embezzled USD$4.5 M out of a company over the course of 15 years by approving fraudulent invoice payments into her personal account. Practices such as having the same person approve invoices and payments can make it easier for any business to fall victim to fraud. Since approvers play a critical role in controlling the flow of finances, it is important to pay attention to their efficacy. Here are some recommendations to help you construct a solid and secure AP approval channel.
Approval channel best practices
Approval channels are rules designating invoices, purchase orders, expenses and payments to managers or team leaders for approval. After an invoice has been coded and matched to a purchase order, it will be directed to the designated approver for the next step which is typically a payment.
After setting up approval channels for thousands of AP professionals, we recommend the following best practices:
- Create multi-level approvals: set up at least two levels of approval. You could also categorize this by setting up a dollar threshold, for example invoices above $1,000 go to two different approvers. Some systems allow you to modify this flow so that an invoice can only proceed for payments after both approvers have approved.
- Separate approvals for invoices and payments: the manager approving invoices should be different than the team leader approving payments. This will enhance your risk prevention strategy of company funds getting fraudulently routed.
- Formalize your approvals matrix: document a formal organizational structure of your approval channels and follow that. The structure should clearly define who the approver is, what timeline they have for approval, and who the secondary approver would be in their absence.
- Segregate duties: GAAP (Generally Accepted Accounting Principles) recommends segregation of duties for accounting best practices. Separating duties prohibits acquisition of financial decisions by one person.
- Build a purchase order approval workflow: set up internal rules for making a purchase before placing an order. You can start by creating a requisition for internal approval that gets authorized by a manager or finance department, and is then sent to the supplier. Various workflow management systems allow setting up trigger-based actions to manage purchase orders.
Automation of approval channels
Companies looking to implement sophisticated approval channel controls can also explore an automation software. AP automation offers customizable approval channels based on the requirements of the company. For example, Beanworks is one of the few AP software solutions offering a highly customizable organizational structure with separate approval workflows for all accounting processes – purchase orders, invoices, and payments.
Here are the three core benefits:
- Restricts unauthorized access: only authorized approvers can check status, history, previous reports, and approve an invoice or payment.
- Customized routing: invoice can be routed based on location, department, project, vendor etc. For example, an employee in Vancouver can code an invoice to the company’s New York location’s marketing head. That marketing head can collaborate on the document by entering any comments or questions online, without having to go through a paper or email trail. This creates an electronic audit trail of all approval steps completed for every document.
- Approval sub-sets: CFOs can create sub-sets or a criteria for certain types of invoices. For example, an invoice could be marked approved after one of the two approvers has approved. Companies can modify this flow further so that an invoice is only approved when all approvers have reviewed and accepted.
We often hear about constantly updating processes to keep our business competent, yet continue to “make-do” with antiquated systems. Sometimes even a minor change can lead to a larger impact. General Electric mentioned that 1 percent improvement in oil recovery was worth 80 billion additional barrels per year – an equivalent of billions of dollars in additional revenue. At a time when the financial arm of a business is more important than ever, we recommend investing in approval process management. It can help you reduce costs by eliminating inefficiencies, keep your team focused on more strategic work, and safeguard the spend of your organization.
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The latest addition to this AI-backed feature-set is a tool called Line Item Capture, which further simplifies invoice data entry by extracting line item information, such as descriptions, unit costs, and quantities with 99%+ accuracy.
How To Perform a Health Check On Your Accounts Payable
Research has found that following up on invoices is a lengthy process, which can take up to 20% of a typical AP clerk’s time. Calculating exactly how much time your business spends on approvals can help you identify bottlenecks slowing you down.
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