How to set approval limits and cost centres for a new budget year

A budget gets signed off and then, in most businesses, nothing underneath it changes. The cost centre list stays as it was. The approval thresholds stay as they were. The people who can approve spend are the same people who could approve it before, at the same amounts, whether or not their budget has gone up, gone down, or moved to someone else.

That gap is what stops a budget from controlling anything. It is one of the five problems we set out in what goes wrong when finance teams build next year's budget, and this is the practical job of closing it. It is worth doing before the new budget year begins rather than after the first arguments.

When a new budget year starts, the controls underneath it need resetting, not just the numbers. That means matching the cost centre list to the budget structure, naming one accountable owner per cost centre, setting approval thresholds against the size of each budget rather than by job title, adding a second approver only where the risk justifies the delay, and arranging leave cover with automatic escalation. Do it before the year begins, and write the whole setup down on one page.

What goes out of date when the budget changes

Five things, usually:

• The list of cost centres, meaning the departments or projects that costs get charged to.
• Who owns each of those cost centres.
• The amount each person can approve without anyone else being involved.
• Which requests need a second approver.
• Who covers approvals when the usual approver is away.

None of these are difficult to change. They get missed because no single person is obviously responsible for them.

Match the cost centre list to the budget structure

Start here, because everything else depends on it.

Three problems come up most often.

Cost centres exist for teams that no longer do. Nobody deletes them, so spend can still be coded to a department that was merged two reorganisations ago.

New teams have no cost centre of their own, so their spend gets coded to a general or miscellaneous line. That line then grows every year and nobody can say what is in it.

One cost centre covers two teams with separate budgets. Both teams then appear to be within budget or over it together, and neither manager can see their own position.

Fixing this is unglamorous work with a real payoff, because a budget report built on the wrong cost centres cannot be corrected further downstream.

Name one owner for each cost centre

Every cost centre needs one named person who is accountable for what gets spent against it. Not a team, and not two people jointly.

The owner is the person accountable for the budget, which is not always the person who does the buying. An office manager may place most of the orders while the operations director owns the number.

Where this goes wrong is when nobody is named. Requests then route to finance by default, and finance ends up approving spend it has no basis for judging. If finance approves everything, nobody in the business owns anything, and the budget holder can reasonably say they never agreed to it.

Set thresholds against the size of the budget

A threshold is the amount a person can approve on their own, above which someone else has to sign off too.

Most businesses set these by seniority, so all managers get one limit and all directors get another. That is easy to administer and it produces odd results, because a manager responsible for a small budget and a manager responsible for a large one end up with the same authority.

A better starting point is to relate the threshold to the budget it draws on. One workable rule is that no single approval by one person should be able to consume more than a small fraction of that budget's annual total. Set it so that a genuinely significant commitment always involves a second person.

Be realistic about the trade-off in both directions. Set thresholds too low and almost everything escalates, approvers stop reading what they are approving, and you have added delay without adding control. Set them too high and substantial commitments get made by one person with nobody checking.

A threshold also only means something if the budget figure behind it is current, which is a separate problem covered in why budget overspend shows up too late.

Decide where a second approver is worth the delay

Every extra approval step costs time, and people route around processes they find slow. So add second approvers deliberately rather than everywhere.

The cases that usually justify one:

• Anything above the threshold you have just set.
• A supplier the business has not used before.
• Spend that crosses more than one cost centre.
• Spend on assets rather than running costs, because the commitment lasts beyond this budget year.
• Anything where the person requesting it is also the person who would normally approve it.

Everything else can sit with a single approver. A three-step workflow on a stationery order teaches people that the process is not serious.

Set up cover before people go on leave

Approval work does not pause when the approver is away, and the end of the year is when both leave and spending are heaviest.

For each approver, name a substitute in advance and decide whether they take the same limit or a reduced one. Reduced is usually right, with anything above it waiting or escalating upwards.

Also set a rule for what happens to a request nobody has actioned. Escalating automatically after a set number of days is better than someone in a department chasing an approver by email, because it puts the delay somewhere visible.

Decide who can raise a request, not just who approves one

This one gets forgotten. If anyone in the business can raise a purchase request, approvers get more volume than they can meaningfully review. If only finance can raise them, the request gets created after somebody has already told the supplier to go ahead, which defeats the point.

The usual middle ground is that anyone can raise a request, with a small number of fields they must complete, including the cost centre and what the spend is for. The approver's job then becomes a decision rather than an investigation.

Write the setup down

Put all of it in one place: cost centres, owners, thresholds, where second approvals apply, cover arrangements, and escalation rules. One page is enough.

Review it whenever the budget changes and whenever someone leaves or changes role. Without a written version, the only record of how spend approval works in your business is the configuration of whatever system you use, and nobody reads that until something has already gone wrong.

How this works in ApprovalMax

ApprovalMax is where most of the above gets configured rather than documented and hoped for.

Cost centres come from your accounting system rather than being maintained separately, so the list people select from when raising a request is the same list the budget is built on. Approval workflows route requests by amount and by cost centre, so the thresholds you have just set are applied automatically instead of relying on people knowing what their limit is.

Multi-step approvals let you apply a second approver to the specific cases that need one and leave everything else on a single step. Substitute approvers can be set in advance for planned leave, and requests that sit unactioned can be escalated rather than forgotten.

Because every decision is recorded against the request, you also end up with a clear record of who approved what and when, which matters when someone asks how a cost centre went over budget.

It connects to Xero, QuickBooks Online and NetSuite.

Other posts in this series

• What goes wrong when finance teams build next year's budget
• Why budget overspend shows up too late