Your guide to navigating the freight audit process
Third party freight audit services promise benefits they can’t always deliver. Learn how software delivers savings, accuracy, speed, and data completeness.
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5 minutes to read
If the past few years taught us anything, it’s the pressure to cut costs that fuels innovation when businesses need to remain profitable. Companies face an ever-increasing demand to control spend and stay ahead of an unpredictable economy. Every dollar spent must generate a best-in-class customer experience at the lowest operating expense.
Logistics costs constantly fluctuate. Fuel, warehousing, labor, and inflation remain high while low transportation rates squeeze carriers. Every carrier is desperately looking for consistent freight and on-time payments and many are forced to file for bankruptcy.
The supply chain is an industry with constant friction-- instability is all but guaranteed. This reality makes optimizing supply chain spend a priority. Achieving this is a complex challenge with the supply chain’s mass fragmentation, low standardization, and disconnected systems and stakeholders.
This article looks at how you can make the most of each dollar spent. We'll discuss improving your freight invoice reconciliation, the pros and cons of different audit practices, and the game-changing improvements that high-quality supply chain spend data unlocks.
Why freight audits are vital for freight accounting and P&L
Freight audits are the first line of defense for protecting cash flow, reducing shipping spend, and meeting the operational budget. But manual auditing is cumbersome and usually inaccurate. It leaves money and efficiency on the table. Even if you outsource your audits, every company is trying to do more with less given the tight economy, so your quality is at risk.
Rigorous freight auditing protects shippers from unnecessary losses and late payments. A robust auditing program reduces risk, ensures contract compliance, and identifies invoice issues that sap profit. It sheds light on the 20% of all invoices that contain errors and misapplied charges, directly impacting profit and loss.
Companies that activate freight auditing gain advantages over competitors that don’t in the following ways:
Financial compliance: Freight audits identify misapplied charges, missing discounts, payment term compliance, and savings opportunities to unlock profit. A key component of financial compliance is being able to track costs across general ledger codes, products, contracts, facilities, lanes, etc.
For example, you might see that a certain facility is using a public tariff instead of your discounted rate. Once you can accurately track your money trail, you can optimize your spend by fixing upstream issues. For public companies, auditing also powers regulatory compliance efforts.
Operational compliance: Streamlined operations are the foundation of spend control. Auditing ensures contract adherence, so you know what has been agreed upon matches what’s invoiced. This boosts carrier compliance and fixes the structural issue behind inaccurate invoices.
For example, a carrier may be using the wrong class on their LTL invoices or they may not have updated their pricing with the latest tariff. Better visibility means you catch every issue and understand why it occurred. This clarity improves carrier relationships, collaboration, and efficiency. All too often, shippers receive the threat from a carrier they need to stop hauling because of balance dues. These inefficiencies in your operational compliance processes cost you time and money.
Performance insights: Auditing results offer valuable insights on spending, contract needs, and carrier choice (matching the right carrier to the shipment, volume, and routes). All of these data points tells a story. They highlight performance gaps, showcase trends, and identify where you network needs adjustments.
For example, you might identify lanes where volume has increased due to customer changes. This means you can negotiate better discounts from your carrier partners for those lanes.
Freight audit process: How do you audit freight invoices?
Invoice auditing looks at the negotiated contractual terms of a transaction (expected costs) and what is charged for each shipment (invoiced costs). Given the volume pumped through these networks, a systemic approach is a must in 2024. Audits are tedious and repetitive tasks. Humans find this type of work to be a slog, but software loves it.
The basic audit workflow of comparing expected costs to invoiced costs is the same for manual, software-automated, and third-party audits. Even if pricing isn’t fixed, variable costs from accessorials or volume discounts should have pre-negotiated rates.
These are the steps to follow to conduct a well-structured freight audit:
1. Collect invoices and supporting documents: Gather all invoices and documents for the audit, including bills of lading, shipment packets, contracts, and rate sheets. Pull the data from supporting documents to compare invoiced costs to expected costs.
This sounds simple but the reality is these documents will be in many different formats (from PDFs to pictures of pictures) and have inconsistent fields populated. Logistics-AI cleans data, makes it readable, and stores it in a central system.
2. Audit rates, services, and accessorial costs: Ensure all invoiced costs reflect the contractually agreed-upon terms:
Rates
Mileage
Fuel costs
Classifications
Service levels
Accessorials
Discounts
3. Define the discrepancy threshold: Decide the tolerance for billing errors to trigger an exception.
4. Understand exceptions: Identify when billing errors exceed the error tolerance. Conduct root-cause analysis to determine the underlying issue (such as a missed discount, inaccurate rate, or unexpected accessorial). Document addressable errors and note the associated contract clauses to streamline resolution.
5. Request adjustments or approve invoices for payment: Streamline your resolution process for accurate accruals to ensure carriers get paid on time and that your budgets stay on track. When an invoice exception occurs, carriers often wait up to 15 extra days to get paid. This is painful, especially when exception management can be automated in minutes with logistics-AI.
6. Execute payment: Pay the right amount, at term, every time. Sounds simple but this transaction is a two-sided relationship so there can be friction. Carriers are in an asset-heavy business and need capital to keep their equipment running. To improve carrier relationships, you want to pay on time, every time. Or even better, use payment automation to unlock supply chain financing, like quick pay discounting. It's a win-win. Carriers love to get paid early. And for you, well, who doesn’t love a discount?
Types of freight audits
Although the workflow for a freight bill audit follows a predictable path, there are many ways to handle the audit independently or through third parties. Some companies build full-scale internal freight audit solutions or small-scale systems for “gut checks.” Many outsource auditing to third-party vendors while others use audit automation software to streamline the process.
Internal freight auditing
Many companies, especially those with a smaller operating budget or only shipping with one mode, such as truckload, start with internal freight auditing procedures. While these systems may yield some savings in the short term (given the right expertise and bandwidth), as shipping volume and modes increase, so does complexity. This robs the company of critical productivity and savings.
In-house manual auditing:Although in-house auditing affords companies control of the process, it has an opportunity cost. In-house auditing requires large, expensive operational teams to accurately audit data. These teams must have supply chain expertise and the bandwidth to process hundreds or thousands of documents a month.
The heavy time investment from transportation and finance teams hurts productivity and collaboration. Document management quickly becomes burdensome and requires continuous monitoring. Without a great document collection and management process, you can’t accurately audit freight costs or your Over, Short, and Damages (OS&D).
In-house “gut check” audits:Lighter-weight manual auditing is the most common scenario for shippers. A stakeholder or small team sets an invoice value threshold and reviews “big ticket” invoices that surpass a certain dollar value. While quick scans provide a slight increase in visibility, they have limited effectiveness.
Gut checks look at the numbers but do not have rigorous financial compliance or controls. Have you ever logged into SMC3 to check the exact rate for a specific tariff? Are you consistently looking at the U.S. On-Highway Diesel Fuel Prices to check fuel surcharges? Most don’t.
This high-level review consistently fails to identify issues. Worst of all, the audit results can’t offer comprehensive insights into larger patterns and opportunities. All too often, after a FRP cycle carriers will bill at a legacy rate because the new rate was never updated in both the carrier and shipper systems. This mismatch disrupts financial planning, as the savings projected by the procurement team during the RFP process fail to materialize because the new rate is never applied.
Internal-built software audit systems: Some companies build custom internal systems for auditing functions. These are often part of their existing ERP, where modules are customized to try and meet business needs. This approach seeks to achieve the control of in-house auditing with the speed and data visibility of technology. While it can be effective in limited circumstances, the cons outweigh the pros for most organizations.
Building software requires extensive internal engineering resources and technology investments. This approach is prohibitively expensive, from initial implementation and maintenance to innovation costs. It’s also difficult to build a system dynamic enough to keep up with shipper and third-party logistics (3PL) providers’ continual supply chain changes.
The real downfall of homegrown auditing software is that innovation, automation, financial compliance, and contextual insights are not the core competencies of these solutions. They often lack the sophistication to build and activate financial tools like quick pay discounting and factoring, let alone evolve with new technologies such as machine learning and artificial intelligence.
Outsourced freight auditing services
Many companies use third-party auditing services due to the perceived time and resource savings. While a freight invoice audit can create considerable cost savings, the drawbacks of outsourcing can diminish the cost benefits over time.
Third-party auditing services have several concerning disadvantages:
Low-quality data: Outside auditors often work with incomplete data that sits in a silo. Shippers often can’t access their supply chain and spend data, let alone understand their audit rationale, and access self-serve analytics.
Labor costs: Third-party auditors don’t eliminate internal labor costs. It transfers the costs to outside agents who don’t understand the shipper’s network so they often still rely on internal SME’s knowledge. As an example, many exceptions get kicked back for the shipper to settle on their own. This means most of the work and burden come back to in-house resources.
Manual workflows: Third parties predominantly use larger operational teams or BPOs to run manual audits. This means more errors because people make mistakes and outsourced teams lack the context.
Persistent structural issues: Third-party models aren’t motivated to fix the underlying billing errors. Since many servicers’ fees are based on a percentage of found savings, they have no incentive to fix the root cause.
Delayed audit results: Third-party auditing takes time, delivering much slower results than a software-based solution.
Third-party freight auditing software
Successful, modern freight audits don’t happen on a spreadsheet; they happen in the cloud. A third-party freight audit software solution delivers all the benefits other methods promise but can’t deliver.
Data centralization: Logistics-AI (machine-learning models built specifically for supply chain language and trained only on industry data) allows shippers to collect all supply chain and spend data in one place. Software can read and harvest vital information regardless of format (docs, JPEGS, PDFs, electronic data interchange (EDI) files, Excel spreadsheets, HTML) or source (email, API, mail, etc.).
Automated analysis:Audit platforms can use this data to compare invoices to contracts and supporting documents. They identify discrepancies in invoices to improve accuracy and effectively track credits.
Manual work reduction: Software cuts labor hours from in-house manual auditing by up to 80%. Most importantly, it boosts audit accuracy and provides centralized data.
How is a software audit different from a manual audit?
Manual auditing requires a person to perform reconciliation steps to compare the invoiced costs to the expected contractual charges This manual comparison is prone to errors and slow processing.
In a software audit, the system centralizes all available data for comparison and analysis, which could include:
Carrier contract
Emailed BOL
Loadboard documents from freight matching services
Short message service (SMS) receipt
In-app proof of delivery information
The shipment will determine the documents that are generated. However, every software-driven transportation invoice audit follows more or less the same flow:
The carrier completes the shipment and then sends an invoice and necessary documentation to the shipper.
The shipper sends relevant documents to the software.
The technology links every document associated with a shipment and extracts its data into a central database.
The platform ensures that it has all the necessary documentation to accurately audit an invoice.
The system compares the invoice against shipment data and contract to ensure accurate costs across rates, services, and accessorials.
A completed audit results in one of two actions:
The audit finds no exceptions and approves the invoice.
The system flags an exception, highlights why the issue occurred, and surfaces the error with its root-cause for a person to resolve.
Once the invoice has been approved, it sits in the payment queue. The payment will be remitted depending on carrier specifications, payment methods, and contractual terms.
Modern audits empower shippers to offer quick pay discounting to their carriers. Shippers get a small discount and carriers get paid early. It’s a win-win.
Common freight audit challenges
Data inaccuracy and process inefficiencies cause most challenges in freight auditing. Hard-to-read data, missing documents, and the complexity of freight billing terms require a Ph.D. to master.
Companies often face a combination of challenges that hurt their margins:
Trapped data: Outdated systems and different document formats make extracting data difficult. In addition, pictures of scanned documents are often fuzzy and hard to read to the human eye.
Siloed systems: Supply chain and spend data often means multiple systems and disjoined data leads to inefficient workflows. Since the aim of a freight audit is to ensure that every invoice is accurate, the focus is on the transaction but what about visibility at the carrier or network level? If shippers don't have this, they can’t understand their costs in aggregate across BUs, facilities, accessorials, etc.
Duplicate data: Duplicate invoices are a common challenge in audits, especially for vendors with paper-based systems. When a carrier still needs to be paid, rather than check on the invoice, they will re-trigger it. Without a unified system, a duplicate payment will go out. Even if it’s blocked, it’s hard to know if an invoice is a duplicate or has important adjustments due to large charges such as lumper fees.
Manual auditing: Staying with time-consuming, human-executed audits increases costs, reduces productivity, and facilitates mistakes. Worst of all, it keeps data and knowledge siloed.
Legacy payments: Shippers still using paper checks are more susceptible to risk, delays, and late fees. They also miss the opportunity to make money with financial tools. Legacy payments hurts working capital.
Freight audit tools and strategies: How to optimize the audit process
Choosing between manual and software-enabled freight auditing is actually choosing between stagnation or long-term success. Resilient and cash-savvy companies are moving beyond supply chain digital transformation toward complete supply chain spend visibility and workflow automation.
To stay competitive, you must modernize your financial ops and freight data infastructure. This will not only eliminate losses and uncover savings insights but it will get the most of your most valuable assets, your employees. These best practices help companies uplevel their audit process:
Digitize all supply chain and spend data: Use software with flexible ingestion and extraction to access data from any document and source.
Standardize data: Use technology to clean, organize, and unify all supply chain and spend data.
Automate freight auditing: Use logistics-AI to boost audit accuracy, set thresholds, and approve up to 99% of invoices with no touch.
Improve carrier communication: Increase collaboration between internal teams and carriers with clear processes and data. Identify mutually beneficial opportunities, like piggybacking loads and optimizing contract terms.
Activate automatic payments: Use flexible payment software to leverage digital payments and unlock quick pay discounting.
Pay on time, every time: Appropriately age every invoice to boost working capital.
Build strong carrier relationships: Build a network of diverse carriers and be the shipper of choice with streamlined processes, high-quality data to explain exceptions, and on-time payments.
Streamline your freight auditing with Loop
Staying competitive in the new supply chain landscape doesn’t have to cost teams excessive money, time, or productivity.
