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  • Writer's pictureArvind Dang

Developing Financial Authority Norms



The purposes of having financial authority norms are the following.

  • ·      To serve as a guideline that clearly outlines the authorities /responsibilities related to financial decision-making. 

  • ·      To serve as a document that enables financial controls, transparency, and accountability in the organisation across all functions

  • ·      To ensure clarity and timely decisions.

  • ·      To serve as a structured manual to minimize risks of unethical activities

  • ·      To facilitate the implementation of the budgeting process and compliance culture

  • ·      To facilitate empowerment culture, enabling focus on value-adding activities by senior hierarchy.

This blog includes the following aspects related to financial authorisation.

 

AA) The standard payment remittance methods and Segregation of duty approach to prevent unethical activities

BB) List of 11 (eleven) activities -for Developing authorisation norms or manuals for all functions -

CC) Template 1 For authorization norms for the purchase function -1illustration

DD) Template 2 for authorization norms for the sales & marketing  function- 3 illustrations

EE) Template 3 for authorization norms for activation of various documents in ERP-2 illustration

FF) Template 4  Authorisation and activation of PO/Agreements (by F&A team)originating from Finance and accounts function+ Journal Vouchers -2 illustrations

GG) Template 5 authorization norms for payment release PV+ Payment realisation against sales invoices the F&A  function-2 illustrations.

HH) Activities(including unethical) that can affect business adversely.

AA)The standard payment remittance methods

 

The standard payment remittance methods for imports are summarised below.

  • ·      Through Irrevocable LC opening by the importer in favour of the beneficiary (vendor /exporter/)

  • ·      Payment through Bank using SWIFT

  • ·      Net banking /Online banking or Internet Banking directly by the importer

  • ·      TT/Telegraphic transfer

  • ·      Documentary collection(Payment documents received through bank)

  • ·      Open Account(Payment documents obtained directly by the importer)

  • ·      Cash in Advance in Foreign currency (FC) notes

  • ·      International Credit card /Debit card

  • ·      Traveler’s cheques issued by reputed International banks

·      And so on

 

The standard payment remittance methods for local buying are summarised below.

 

  • ·      Net banking /Online banking or Internet banking

  • ·      Bank transfer -IMPS,NEFT (IFSC codes)

  • ·      UPI – Unified Payment Interface(UPI)-

  • ·      Bank cheques or Demand draft

  • ·      LC -Letter of credit

  • ·      Buyer’s Cheques

  • ·      Debit cards or Credit cards

  • ·      Cash

·      And so on


The buyer and seller must decide on a mutually acceptable payment method and make it a part of the purchase order or agreement to be jointly signed.

 

In addition to viewing this article, the professionals can also listen to my video on the subject as per the link below.




More details are also available in my book on Amazon below.

Paper back-amazon link: India

Paper back-Amazon link-Global


BB) List of 11 activities -for Developing financial authorisation norms

Activity 1 

Providing policy directions/directives to CFO and HODs regarding empowerment based on the risk appetite- Responsibility: CEO/MD

Activity 2

Designing Structure/contents of the authority document /manual ( please refer to templates below) Responsibility: CFO

Activity 3

 Identifying function-wise workflows and documents of each function that need to be authorised. Responsibility: CFO +HOD of each function

Forty-six (46) examples of high-value financial documents vis-a-vis workflows in each function are listed below.


Purchase or materials functions: (4 documents)

  • ·      Purchase order or & agreement or & contract or & service order for buying of inputs like the bill of materials or consumables or consultancy services 

  • ·      Invoices of vendors, consultants or, contractors or, service providers, or business

  • ·      LC opening requisition documents

  • ·      Imports duty documents like Bill of entry

Sales & marketing functions : (6 documents)

 

  • ·      Channel partner engagement letters/agreements

  • ·      Agency commissions of authorized channel partners

  • ·      Incentive claims of channel partners

  • ·      Debit notes or  expense claim vouchers of channel partners or OEM/other

  • ·      Warranty claims of the above entities

  • ·      Purchase order or & agreement or & contract or & service order for buying of

Manufacturing or engineering functions  (3 documents)

  • ·      Purchase order or & agreement or & contract or & service order for buying of

  • ·      Outsourced manufacturing or assembly operations

  • ·      Preventive Maintenance  services related

 

Quality control/Quality assurance functions (2 documents)

 

  • ·      Purchase order or & agreement or & contract or & service order for buying of QC equipment or gauges and instruments, etc

  • ·      Outsourced inspection/testing services

IT/ERP /software (3 documents)


  • ·      Purchase order or & agreement or & contract or & service order for buying of

  • ·      ERP software & and implementation annual support licensing fees, and all other

  • ·      Outsourced software development services 

 

HR function (4 documents)

 

  • ·      Letters towards Appointments, Promotions, retirements, Terminations etc 

  • ·      Payroll computation-related documents prepared in-house or by outsourced

  • ·      Entitlement-related claims of employees in any function

  • ·      Hired (non-permanent)manpower  for any function

 

Administration functions (1 document)

 

  • ·      Purchase order or & agreement or & contract or & service order for buying of 

 

Legal functions (5 documents)

 

  • ·      Agreement or & contract or & service order for hiring of outsourced

  • ·      Bank Guarantees, Performance Guarantees, Bonds, or Undertakings for

  • ·      Penalties and fines

  • ·      License fees

  • ·      Power of attorneys/ MOU’s

 

 Finance & Accounts function –(12  documents )

 Purchase orders or agreements or other accounting documents etc related to the following)

  • ·       Consultancy

  • ·       Borrowings

  • ·       Treasury investment-

  • ·       M&A

  • ·       Joint Ventures

  • ·       FDI

  • ·       Banking

  • ·       Stock exchange

  • ·       Regulatory bodies & Taxation

  • ·       Invoices raised by the company

  • ·       Overheads related  journal vouchers

  • ·       Payroll/reimbursement journal vouchers

. In the ERP-SAP, 12 types of accounting documents are

  • ·      Vendor Invoice-(AP)=KA, 

  • ·      Vendor Invoice-(AP)-Credit notes by vendor  rejection etc=KR,

  • ·      Vendor payment=KZ

  • ·      Customer invoice-(AR)=RE,

  • ·      Customer payment=RV,

  • ·      Customer credit note=RG

  • ·      General Journal Entry=SA,

  • ·      Bank transfer =TR, 

  • ·      Purchase order =BS,

  • ·      Goods receipt=WE

  • ·      Assets acquisition=AB,

  • ·      Assets retirement=RA


 Construction project functions (4 documents)

 

  • ·      Purchase orders for buying of construction materials

  • ·      Agreements or & contracts for civil, interior, and MEP/engineering packages

  • ·      Agreements or service orders for engaging  engineering consultants, liaison

  • ·      Statutory fees/payments for construction projects

 

Common to all functions (2 documents)

 

  • ·      Invoices raised by any business entity not included above

  • . Debit notes or Reimbursement claim vouchers of the business associates or entities listed above

 

Activity 4

 

a)Identifying corresponding financial workflows & documents that need to be authorized in ERP, as applicable vis a vis functional documents mentioned above in each function. Responsibility: CFO

 

A few of these are listed below.

 

·      Workflow for each of the business activities needing financial activation in ERP /software

·      Corresponding account types and accounting  Documents that need approval vis vis 

  • Purchase vouchers

  • Journal vouchers

  • Sales vouchers

  • Debit notes/Claims

 

Activity 5

 

 a)Proposing authority norms for each of the above documents in consultation with the HOD of each function. Responsibility: CFO

 

b) Ensuring segregation of duties while proposing these norms based on

  • ·      Size of organisation,

  • ·      Hierarchical levels & positions

  • ·      Complexity of business processes

  • ·      Degree of automation

  • ·      The risk appetite of the company

  • ·      Ethical environments /culture in the company

c) Authority levels should preferably be level/position-based rather than employee names due to the dynamic movement of employees like promotions, transfers, exits, retirements, etc.

d) Review of the authority document by a cross-functional team comprising all key functions to ensure there will be no conflicting situations while implementing authority documents

 

Activity 6

 

Approval of authorisation document as above in consultation with CFO and concerned HOD of the respective function. Responsibility: CEO/MD

 

Activity 7

Maintaining controlled original approved financial authority documents or financial authority manual. Responsibility:CFO 

Activity 8

a)Controlled circulation of the CEO/MD approved financial authority document through hard copies or soft copies to HOD of respective function for implementation Responsibility: CFO

b) Forwarding a copy of the CEO/MD approved document to HOD-IT/ERP for planning workflows and embedding these in business processes in the respective modules like

·      MM-Materials management workflows

·      Sales and distribution workflows

·      PP-Production planning

·      HR-Human resource management

·      FI-Finance and accounts

And so on

 

Activity 9

Ensuring that   authority documents become a part of the SOP of  each function

Responsibility: HOD-Each function

 

Activity 10

 

. Periodic review  of the above authorisation norms based on :

·      Changes in business activities or new additions to business process activities

·      Changes in documents or new additions to documents

·      Changes in organisation structure in terms of hierarchical levels/positions

Obtaining fresh approval from the CEO/MD and recirculation of controlled copies

 

Responsibility: CFO

 

Activity 11

 

a)Software programming or using workflows (in addition to or alternate to hard or soft copies) in IT/ ERP package solution to incorporate all empowerments mentioned above with inputs from the CFO 

b)Getting such workflows tested and approved by respective HOD+CFO

c)Providing training to all key team members nominated by HOD for smooth implementation of the authority norms

Responsibility: HOD-IT/ERP

 

CC) i) Template Illustration of 5(five) authorization Templates as below to be populated as per activities mentioned above :

 

 

CC ii) A Robust system must ensure that the segregation of duty approach is followed to minimize risks of unethical activities in the financial approval system. C

 

CC iii)These concepts have been used extensively in 5 (five) templates, clearly stating the following.

  • ·      Who can initiate the transaction?

  • ·      Who can review/edit the transaction?

  • ·      Who can approve the transaction?

 

 CC Iv) Template 1- For authorization norms for the purchase function -1illustration


Descriptions/Documents to be authorised column 1

UOM in colum 2

Currency colum 3

Financial limit colm 4

Initiated by colum 5

Reviewed by colum 6

Approved by colum 7

1a. Purchase order for individual Bill of materials -BOM or aggregates (items that make the product), including orders on job workers & subsequent amendments in rates or terms within the purchase policy (Highlighted in note ) terms

Rate/unit

Rs

10

Senior Officer

Deputy Manager

Manager

do

Rate/unit

Rs

10-100

Deputy Mgr

Manager

Deputy General Manager

do

Rate/unit

Rs

100-500

Manager

Deputy General Manage

General Manage

do

Rate/unit

Rs

>500

Deputy General Manage

General Manage

Director

1b. Purchase order for individual Bill of materials items beyond 1 year of consumption or outside purchase policy terms

Rate/unit

Rs

4 slabs as above

one level higher for each line as above

one level higher for each line as above

one level higher for each line as above

and so on lines can be inserted for 2.non-BOM items, 3. Agreements or contracts, consultants, 4. Invoices of vendors of all types

Rate/unit

Rs

to evolve

to evolve

to evolve

to evolve


Notes to the above template 1:

1.     The descriptions/documents, values, currency, etc., indicated in columns 1, 2, and 3 are only for understanding. Organizations can indeed amend these at their absolute discretion.

Separate norms can be for different currencies. Different hierarchical norms can be prescribed  for approving PO of different categories of items like steel, aluminum, electronic, proprietary…..etc  

2 The financial limit in col 4 is hypothetical and can be amended at the discretion of the CFO/Management

3 The designations in columns 5,6 &7 are hypothetical and will be at the discretion of the organization, based on how lean the organization

4 Purchase policy may include aspects such as: a). Advance payments without Bank guarantee, b) Comparative quotes, c) Credit periods, d) Prior-Sample approval, e) Buying from a single source, f) Air freight, g). Order quantity beyond I-year consumption, h) Buying of discontinued items, etc., i) Cash purchase limits, j) Warranty, and so on

 5. Standard Agreement may include aspects/terms relevant to buying of material.


 D) Template 2 for authorization norms for the sales & marketing function: 3 illustrations.



Descriptions/Documents to be authorized.

UOM

Currency

Financial limit

Initiated by



Reviewed by

Approved by


Column 1

Column 2

Column 3

Column 4

Column 5

Column 6

Column 7


1a Channel partner engagement letters/MOU or agreements with -Policy guidelines (Highlighted in note 1)for such engagement

na

Rs

Within policy norms

Area Manager for the territory

Regional manager for the territory

Head of sales


1b-Any Deviation to policy (e.g., evaluation score, investments, size, infrastructure, etc )

Rs

na


Rs

Deviations

To policy

Regional manager for the territory

Head of sales

CEO/MD+CFO


2a-Agency commissions to authorized channel partners- as per Agreement and policy guide line as per  note ) 

% or Amount per unit of sale price

Rs

% or amount to be prescribed  

Sales staff

Area. Mgr -sales

Regional manager-sales


2b-Any Deviation to policy( e.g. % or amount/unit or no/incomplete remittance to company or earlier than credit period  or product billed but held back etc)

do

Rs

do

Area. Mgr -sales

Regional manager-sales

HOD-Sales +CFO


3a-Incentive claims of channel partners-

In accordance with authorised incentive scheme and evidence of accrual of sales benefit and accomplishment of targets

do or Incentive in Kind

Rs

do

do

do

HOD-Sales


3b-Claims in deviation to authorised incentive scheme

do

Rs

do

Regional manager

HOD-Sales

CEO/MD+CFO


Notes: 1,2,3 are precisely similar to those in template 1 and hence not being duplicated

4 Channel engagement policy may include aspects related such as a) Minimum score on standard evaluation parameters for agency, b).Size of plot/building/layouts c) Investment norms for Building infrastructure for sale of products  d) Investment norm for  After-sale service infrastructure e) Skilled Manpower norms f) Initial Spares buying value norms g) Spares stocking policy  norms h) Signage /Display standards investments /norms   i) Financial security deposit  j) Experience in similar dealership k) Territory for sale /service l)Product models permitted m)  % commission payable on net sale value or Rs/unit sold and so on

 

5. Guidelines for the Agency Commission may include aspects like a). % commission payable or Rs /unit sold b) Evidence of shipment. Received by customer c) Sale realization amount transferred to company d) Selling price invoiced to customers as per approved lists e) Sales return within prescribed period f) Credit period on agency commission.

6. Standard Agreement/PO may include aspects/terms related to sales and marketing


EE) Template 3 for authorization norms for activation of various documents in ERP software: 2 illustrations


Descriptions/Documents to be authorized.

UOM

Currency

Financial limit

Initiated by

Reviewed by

Approved by

Column 1

Column 2

Column 3

Column 4

Column 5

Column 6

Column 7

1Activation of approved PO/Agreements  in the ERP/SW  for release of payments towards Supply of :

  • Bill of materials,

  • Non-BOM items,

  • Capital items etc

  • Services any type including advisory, sales promotion, legal, technical

Other expenses /reimbursements

value

Rs

up to 5 Lac

Staff -Purchase acct function

Asst Mgr.

Purchase acct function

Deputy Mgr.

Purchase acct function

do

value

Rs

5-25 Lacs

Asst Mgr.

Purchase acct function

Deputy Mgr.

Purchase acct function

Mgr.

Purchase acct function

do

value

Rs

>25 Lacs

Deputy Mgr.

Purchase acct function

 Mgr.

Purchase acct function

 Senior Mgr.

Purchase acct function

2 Activation of approved agreements of MOU/Channel partner, Dealer or Customers /client towards Sale of products, spares, rendering of services  for payment release towards

  • Agency commission

  • Incentives etc

other expenses/reimbursements

value

Rs

Up to 5 Lacs

Staff -sales acct function

Asst Mgr.

Sales acct function

Deputy Mgr.

Sales acct function

do

value

Rs

5-25Lacs

Asst Mgr.

Sales acct function

Deputy Mgr.

Sales acct function

Mgr.

Sales acct function

do

value

Rs

>25Lacs

Deputy Mgr.

Sales acct function

Mgr.

Sales acct function

Senior Mgr.

Sales acct function

Notes  


4. For segregation of duties & simple understanding, three types of sub-functions have been assumed and, accordingly, designations indicated in the above table.

  • Those dealing with purchase-related matters are Titled here as “Purchase Account.”

  • Those dealing with sales & marketing-related matters are titled “Sales Account.”

  • Those dealing with all matters other than the two above are Titled here as General ledger –“GL Account.”

Of course, organizations can add more/delete/edit such designations.

    5. The PO/Agreements that have not been approved as per approved authority norms must not be activated in ERP/SW till    amended

6. It is desirable that all PO/Agreements beyond a threshold value, say beyond Rs 1 Lac, are also vetted by the Legal & secretarial team 

 

FF) Template 4  Authorisation and activation of PO/Agreements (by F&A team)originating from Finance and accounts function+ Journal Vouchers: 2 illustrations


Descriptions/Documents to be authorized.

UOM

Currency

Financial limit

Initiated by

Reviewed by

Approved by


column 1

column 2

column 3

column 4

column 5

column 6

column 7


Consultancy related

1a-Agreements with Advisors, Consultants or &  legal advocates  or &  investment brokers or &   merchant bankers or & underwriters or & Registrars etc

Value

Rs

up to 5 Lac

Sr Mgr.

Corporate Accounts function

DGM.

Corporate Accounts function

GM

Corporate Accounts function


do

Value

Rs

5-25Lac

DGM.

Corporate Accounts function

GM.

Corporate Accounts function

CFO


do

Value

Rs

25 Lac

GM.

Corporate Accounts function

CFO

CEO


1b)-Activation of above approved agreements in ERP/SW for payment release or investments

Value

Rs

Amount to be prescribed or any  

Dy -Mgr. Corporate Accounts function

Mgr. Corporate Accounts function

Sr-Mgr. Corporate Accounts function


Borrowings/investments related.

2a) Preparation of proposals or & Bids, Negotiations & approval of agreements such as below as per policy direction of board sub-committees:

  • Borrowing agreements

  • Treasury Investments agreements

  • M & A, Joint ventures,FDI

  • Banking, Stock exchanges

  • Regulatory bodies

And so on

Value

Rs

Amount to be prescribed or any  

GMCorporate Accounts

unction

Head Legal & Secretarial and Heads of relevant functions

CFO+CEO


2b) Deviation to the above

Value

Rs

Any

CFO

CEO

Board sub committe


2c)-Activation of above-approved agreements in ERP/SW for payment release or investments

Value

Rs

Amount to be prescribed or any  

Dy -Mgr. Corporate Accounts

Mgr. Corporate Accounts

Sr Mgr. Corporate Accounts


Notes:

Point 1,2,3 are exactly similar to those template 1 and hence not being duplicated

4 PO/Agreements are not to be activated if these are :

  • Not approved as per functional authority norms or

  • PO/Agreements contain clauses which don’t conform to statutory requirements or

  • PO/Agreements contain clauses that don’t conform to documented corporate policies.

5. The descriptions/documents mentioned above, as well as the values and levels/designations indicated, are only for understanding. Organizations can amend both of these at their absolute discretion.

 

GG). Template 5 authorization norms for payment release PV+ Payment realisation against sales invoices the F&A  function: 2 illustrations.


Descriptions/Documents to be authorized.

UOM

currency


Financial limit

Initiated by

Reviewed by

Approved by

Column 1

Column 2

Column 3

Column 4

Column 5

Column 6

Column 7

1a Payment vouchers for payment release to  vendors, contractors, consultants subject to 3-way matching of:

  • PO/Agreements

  • Invoices /bills

  • Goods/services receipt -QC  accepted document

This includes purchases initiated by  any functions

Value

Rs

up to 5 Lac

Staff -Purchase acct

Asst-MgPurchase acct

Staff -Purchase acct

do

Value

Rs

5-25Lac




do

Value

Rs

>25Lac




2a. Sales voucher for payment realisation against invoicing of products or spares or services to direct customers or channel partners subject to 3-way matching of:

  • Customer /channel partner order

  • Invoices /bills  of the company along with shipping bill

Invoicing as per approved Prices/credit and shipping terms

Value

Rs

up to 5 Lac




do

Value

Rs

5-25Lac




do

Value

Rs

>25Lac




HH) Activities(including unethical) that can affect business adversely

  • The Involvement of respective HODs in developing authority norms is low

  • Authority norms proposed are skewed in some of the functions in favour of some individuals

  • Authority norms do not factor in the following

    • Size of organisation

    • Hierarchical levels & positions

    • The complexity of business processes

    • Degree of automation

    • The risk appetite of the company for empowerment

    • Ethical environments /culture in the company

 

  • Uncontrolled financial authority documents/manuals are available in some of the functions.

  • The workflow developed is not robust, or workflow is not pre-tested/approved by user functions.

  • The list of workflows and documents identified is not comprehensive.

  • Actual approval is done by someone lower than mentioned in the authority document.

  • Periodic updating of authority documents is not done.

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