What Your CFO Needs to Know About Freight Accruals

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Nearly every shipper who transports freight is faced with the same issue: how and when does your finance department account for the cost of shipping, logistics, and delivery?

If you're like most shippers, you already set aside a certain percentage of a good's value or a cost of goods sold (COGS). On a given shipment, X% (typically 10%) of the total COGS would be set aside as the debit balance – decreases would be noted as credits while increases would be noted as debits. This is your freight accrual.

Freight accruals, like most aspects of logistics, are a seemingly simple operation that actually has a series of complex events which most occur in order for a shipment to be received and accounted for properly. Put simply, freight accruals demand oversight.

Here are three things accounting needs to know about freight accruals:

1. Account for costs dynamically – Since many general accounting departments aren't entirely versed in the intricacies of freight billing, they'll use a set percentage to determine their freight accruals. Let's say that that percentage is an industry standard 10%. Well, what happens when market conditions change and your transportation costs go up or down? For example, this year alone, the spot rate trucking market is up 28%. Large shifts in freight pricing can throw off projections and lead to much higher accruals.

Freight accruals aren't just there to cover the cost of transportation, either. When an invoice is received, additional information – such as charges for unplanned logistics expenses – may cause the shipment cost to change. Since there's a very good likelihood that these final charges won't match an even 10%, your freight accrual ledger is now and always will be inaccurate.

However, if a shipper or transportation management firm were to record all costs dynamically during a shipment's life cycle then the final shipment invoice would be the final freight accrual. Having an accurate freight accrual can free up revenue and limit exposure to financial risk.

2. Know where your freight is – Many accounting departments reconcile their freight accruals when a shipment is delivered. Unfortunately, accounting isn't always notified when that delivery occurs. This causes accruals, that could be off the books, to age. Ultimately, this ties up revenue and paints an inaccurate financial projection.

If accounting is entering freight charges as they change during each stage of a shipment then they're also monitoring where each shipment is at any given point in the supply chain. In addition to simply pulling costs, other key data can also be updated such as transit times and delivery dates. Since many companies close out their freight accruals when a shipment is delivered it is imperative that accounting know exactly when that occurs.

3. Partner up – With freight costs escalating it is critical that your accounting team remain vigilant when handling freight accruals. Optimized freight accounting practices can save you a substantial percentage off the cost of every single freight shipment, whether inbound or outbound. The more accurate your records are, the more opportunities for savings will present themselves.

Fortunately, they don't have to go it alone. A trustworthy transportation management firm can aid your accounting team in maximizing their efforts and help to bridge the gap between your finance and logistics departments. A transportation management firm can also provide freight bill auditing and generate custom reports that will enhance your bottom line and assist you in making better business decisions concerning your freight. Let them put your data to work for you.

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