P2P Fundamentals - Part 1: Do the Right People Really Have Control of What You Are Buying?

Charlotte Sutton
Charlotte Sutton,
In this 4-part series, we address the four fundamental questions finance executives should ask about their organisation’s purchase-to-pay process in order to drive savings. In Part 1, we ask “Do the Right People Really Have Control of What You Are Buying?” 
Financial controls are essential for any organisation and pre-purchase authorisation is key to effective purchase-to-pay management. As people throughout your various departments and functions spend money on behalf of your organisation, you want to know that those expenditures are being reviewed and authorised by the right people before they are committed. 
While you don’t want to burden employees with excessive controls for low value goods like office supplies, you do want to know that multiple levels of management have seen and authorised major expenditures.  Most purchases lie somewhere in between the extremes and should have some level of authorisation. Certainly, you want managers to have the opportunity to approve any significant purchase within their department in order to effectively manage their budgets. 
Why it’s Important
  • Budget control: Without proper authorisation controls, employees may buy things that are not budgeted, not a current priority, or not appropriate for their function. 
  • Quality and risk control: For some types of purchases, such as capital equipment, computer hardware and specialised outside services, the involvement of an expert that understands technical, legal or other category-specific issues beyond the requesting employee may be needed to ensure the right purchase is made. 
  • Fraud prevention: Though the vast majority of purchases are well-intentioned, there is always the risk of fraudulent buying – something you certainly want to prevent.
What to Look For – Key Indicators
  • Invoices with no PO#: A high percentage of invoices arriving in Accounts Payable (AP) without an approved purchase order (PO) on file probably indicates insufficient authorisation controls.
  • Excessive AP workflow: A high percentage of invoices being coded in AP and sent to an appropriate department for approval, effectively getting approval on what has already been spent (i.e. “spent control” vs. “spend control”). 
  • Frequently surprised managers: When managers are surprised that purchases have been made within their department, there is clearly a problem with the authorisation process. 
How to Improve
  • Clearly define authorisation rules: Develop clearly defined rules for approval requirements based on monetary value, item category, department, and other criteria.
  • Make everyone aware: Make everyone in the company aware of these policies and the importance of adhering to them.
  • Track unauthorised purchases: Ask your AP manager to track invoices with no PO to identify frequent offenders.