Although we are less than two decades into the 21st century, those eighteen years have seen a rapid and radical shift in the modern commerce landscape. The internet boom and the birth of e-commerce signaled the decline of the retail outlets and shopping malls across the country with companies such as Amazon leading a push into new, modern, online markets. Because of this seismic shift within the industry and the emphasis placed on rapid home deliveries, sellers of goods or products are regularly shipping in astronomically higher levels in both frequency and volume as is evidenced by the massive growth, in the billions of dollars, in both the full truckload and less than truckload freight industries.
As a result, retailers or vendors are even more reliant upon their freight carrier than ever before. So, it follows that rates have risen in response to that ever-growing demand. Further, supply chains are longer, lead times shorter, which means freight costs account for an ever-growing share of a businesses’ total overall costs. In response to this, we have seen enterprises emerge within the world of freight whose sole focus is on helping vendors manage their freight and look for ways to optimize and cut costs. Such supplementary businesses include freight forwarders, freight brokers, and third-party logistics companies.
Whether or not you utilize any or all of these services, there are certain critical aspects of your freight logistics that you should not only be aware of but be able to handle yourself. One of the tools you should have at your disposal is the ability to audit your freight bill. Knowing how to audit your freight is essential for a variety of reasons including cutting freight costs, increasing efficiency and keeping your carriers honest and accountable. Below, we will discuss how to audit your freight bill and the benefits of doing so.
What is a Freight Audit?
At its essence, a freight audit is the process of examining and confirming the validity of invoices charged by a freight carrier. Through this careful examination, a shipper can verify the accuracy of their bills. Conceptually, it is quite simple; your goal is to pay the freight charges you owe and not a single cent more. While it is quite popular these days to utilize software to do much of the legwork, some freight audits can only be done by hand. Regardless of the method, an audit will only occur after the freight invoice is received and payment should only be made after you have confirmed the accuracy of all charges.
The Difficulty of Freight Audits
While a freight audit may sound simple on the surface, it is, in truth, anything but. Freight audits are a complicated process, made only more difficult by volatile shifts in global fuel prices. Very few industries’ rates are as inextricably linked to one factor as the transportation industry is to the cost of fuel. Because of this, your freight cost will rise and fall with the cost of transportation, which is directly tied in with the current price of oil. Because of these regular and rapid fluctuations of fuel costs paired with the unpredictability of forecasting future oil costs, your freight costs may vary wildly. As you might imagine, when you have a host of different costs of service, verifying that you are being charged correctly becomes an even more challenging task.
Calculating costs manually can be an even more daunting undertaking when you are handling hundreds of shipments each and every month. Consequently, such freight invoices are increasingly susceptible to human error on either the part of the carrier or the shipper. This is especially true on the part of the shipper (read as auditor) when considering how convoluted freight invoices can be. Therefore, to avoid such processing errors and overpaying a meticulous freight audit must be carried out.
Beginning the Freight Audit
These days, freight audits are typically categorized as pre-audits, which means the bill is audited prior to payment. This allows shippers to have greater leverage and an easier way to pay the proper amount. Upon receiving a freight invoice, your first task should be to input that data into your system either manually or via EDI (electronic data interchange). This allows you to have instant visibility and gives you an easy way to check that bill or to compare it to past invoices. Once this information is uploaded, your goal is to verify the validity of the invoice.
Some things worth checking when auditing your freight invoice include:
- Are there duplicate invoices? – Were you double charged for a freight shipment? Did your carrier count one shipment as two separate shipments? Such a phenomenon is more common than you might think, especially when using electronic services. According to a White Paper study, regardless of industry, “On average, approximately 0.05% to 0.1% of invoices paid are typically duplicate payments—which for a medium-size organization with annual costs of $100 million over a three year period could represent a loss of $300,000.” Multiple invoices can result from different options for receipt and payment of invoices, lack of rigid controls in accounts payable, or unethical carriers. To prevent such a thing occurring look for the following:
- Search for invoices with identical or similar dollar amounts
- Search for invoices that have identical invoice and vendor numbers, but have received payment from separate accounts
- Search for invoices paid to similar vendors with the same address, bank account, and routing number
- Search for invoices with closely matching invoice numbers, which could be a result of errors in data entry
- Search for invoices made to the same vendor from varied source documents
- Was the proper classification applied? – The National Motor Freight Traffic Association (NMFTA) regularly updates and publishes the National Motor Freight Classification. This sets a universal standard that allows companies to compare commodities. The Commodity Classification Standard Board groups commodities into one of 18 subclasses, ranging from 50 to 500. Classes are based on four factors, density, liability, handling, and stowability. Classes have different rates, so it is vital that you ensure your freight is being appropriately classed and charged accordingly.
- Have all discounts been applied? – Do you have agreed upon discounts with your carrier? Do you consolidate shipping with other shippers, or ship on off days, or not need your products delivered as quickly? If so, be sure to check that each and every one of these discounts have been deducted from the total freight invoice.
- Were accessorials charged correctly? – A freight carrier will often charge for services that they consider above and beyond the call of duty, these include delivery area surcharges, additional handling charges, weekly pick up fees, residential delivery, and other such accessorials. Such charges can be exceedingly difficult to examine and confirm, especially since you generally remain unaware of them until after the shipment is made. Regardless, confirm that you not being incorrectly charged for accessorials, and if prior agreements have been made that included the waiving of certain accessorials, be sure to verify that those too are being honored.
- Are you using the correct base rate? – Each carrier has their own base rates, but frequently, shippers will have all their carriers use a 3rd party base rate.
- Does the math add up? – After confirming that you have been charged for all of these categories correctly, make sure that the figures add up correctly. Again, human error is not at all uncommon, so it is entirely possible that everything listed above was applied correctly and yet a simple mistake of addition or subtraction, or the wrong number input, can lead to incorrect charges.
- Are the freight taxes billed correctly? – Are the most current tax laws being employed and are the rates accurate? If you ship internationally, this is especially important since different taxes or regulations apply to different regions, states, or even countries. So, although countries within the EU or Asia may lie in close proximity to one another, their rules and regulations may vary wildly and thus you will be charged different rates.
Means of Freight Auditing
If you are looking to have regular freight audits, there are three basic models available to you. They are as follows:
- Audit internally – A shipper will perform audits in-house and pay staff to provide oversight required for manually processing invoices and then conducting freight audits. While this is a possible route, it is likely the least cost-effective/efficient model. Manually comparing invoices and performing audits can be an exceedingly tedious affair. The likelihood of mistakes occurring or errors missed grows in proportion to the number or freight invoices received and is compounded if you are regularly shipping internationally.
- Outsource your audit – If you do not want to deal with the logistics and costs associated with internal invoice audits, you may contact a third-party freight audit company to focus on sifting through invoices, checking for discrepancies and recovering costs. In many cases, this may be a more cost-effective method, since it allows you to focus on your specialties rather than waste your time or your employees time on tasks they are not ideally suited. Most third-party firms will use a freight audit system, rather than dealing with freight invoices manually.
- Buy invoice audit freight system – You may wish to pay a software licensing company to help you handle your invoices in an in-house manner. Such software allows you to audit bills and track payments seamlessly, however, they do come with extra costs associated with maintaining the system as well as training staff in how to use it.
Benefits of Freight Auditing
Apart from saving your company on costs, a freight audit also supplies you with data that you can study and analyze in order to break down your shipping practices. Such introspection can identify weak spots, logistical breakdowns and highlight ways to improve as a company. While the initial costs recouped are great in the short term, finding areas where you have room for improvement can be far more beneficial in the long run. Doing so allows you to make better choices when it comes to your transportation and shipping practices, which in turn, affects not only your company’s bottom line but your customer’s satisfaction as well. Having such data can also provide you with plenty of leverage when it comes to your freight contract negotiation, and it would be foolish to not use these tools to negotiate discounts and lower rates.
Whether you chose to utilize an in-house audit, a third-party audit team, or a freight auditing system, auditing your freight shipping, odds are you will not only recoup the cost of auditing, but you will likely make more money when all is said and done.