Page 34 - Accounting Best Practices

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3–2 Reduce Required Approvals
The preceding bullet points reveal that there are a wide array of problems
that must first be overcome before the dramatic improvements of this new
process can be realized. However, for a company that has a large accounts
payable staff, this can be a highly rewarding system to install, for the savings
realized can be the elimination of the majority of the accounts payable depart-
ment.
Cost: Installation time:

3–2 REDUCE REQUIRED APPROVALS

The accounts payable process is typically a long one. Part of the problem is that
many accounting systems require a manager’s signature (or those of several man-
agers!) on a supplier invoice before it can be paid. Though it is reasonable to have
such a requirement if there is no purchase order for the invoice, many systems
require the signature even if there is already a purchase order (which is, in effect,
a form of prior approval). Also, most accounting systems require a manager’s sig-
nature on unapproved invoices, no matter how small the invoice may be. The
result of these common approval procedures is that the accounts payable staff
delivers invoices to managers for signatures and then waits until the documents
are returned before proceeding further with the payment process. If the manager
is not available to sign an invoice, then it sits; if the manager loses the invoice (a
common occurrence), the invoice is never paid, resulting in an angry supplier
who must send a fresh copy of the invoice for a second pass through the dangerous
shoals of the company’s approval process. This is a clearly inefficient process,
both lengthy and likely to annoy suppliers. What can be done?
A superb best practice for any company to implement is to limit approvals to
a single event or document and, wherever possible, to limit this approval to a
period prior to the receipt of the supplier invoice. For example, an authorized sig-
nature on a purchase order should be sufficient overall approval to pay an invoice.
After all, if the signature was good enough to authorize the initial purchase of the
item or service, shouldn’t the same signature be sufficient approval for the pay-
ment of the supplier’s bill? In addition, by shifting the approval to the purchase
order, we avoid having the accounts payable staff track down someone after the
supplier’s invoice has been received, which effectively chops time from the overall
accounts payable process. Another variation is to use a signature on the purchase
requisition, which comes before the purchase order. As long as either document is
signed by an authorized person and sent to the accounts payable staff in advance,
it does not matter which document is used as authorization. The key is to use a single
authorization, before the supplier sends an invoice.
One reason why so many companies require multiple approvals, both at the
time of purchasing and at the time of payment, is that they do not have a suffi-
cient degree of control over the authorization process. For example, there may not