Navigating freight accounting: 4 tips to increase margins

Freight accounting has historically been a very hands-on process: labor intensive, paper driven, manually matching contracts to invoices,...it’s a slog. Every team involved in handling invoices and payments needed to touch every transaction, thus increasing the cost to manage. It’s exhaustive, rigid, and expensive.

The fundamental task of assigning freight costs to the correct general ledger (GL) code is complicated and time-consuming. Miscoded charges can lead to missed cost-saving opportunities and a murky view of your network's financial health.

An ever-shifting and turbulent industry demands greater flexibility in freight accounting. You need technology, streamlined processes, and accurate financial data to optimize your shipping costs.

Here, we’ll look at how high-quality freight data and logistics software improves your accounting so you can control costs.

What is freight accounting?

Freight accounting records, classifies, and summarizes freight financial transactions. It’s how finance teams make a detailed analysis of freight costs to inform data-driven decisions. To do so effectively, you need full visibility into the funds coming in and going out:

• Inbound Freight (Freight In): The costs associated with transporting raw materials or goods from suppliers to your facility. Who pays depends on the agreement between you and the seller.
• Outbound Freight (Freight Out): The costs of shipping finished products to customers or distributors. This is typically an expense for your company.
• Intercompany Freight (In-Network): The costs of moving goods within your own company, like raw materials, partially finished goods, or completed products, between different facilities. This can be for consolidation, distribution efficiency, or specialization.

Both inbound and outbound transactions are composed of several moving parts, and it’s important to factor in all of them. An average breakdown of cost categories looks something like this:

• Purchasing or procurement: Expenses linked with the movement of raw materials from the manufacturer to the shipping company. Most often, the payment is fulfilled via procure to pay (P2P).
• Customer shipments: The movement of goods from the seller (shipper) to the purchaser (consignee), in other words, it’s outbound delivery. It usually includes orders to cash (O2C), in which the buyer sends the customer an invoice for the delivery of goods.
• Letters and documents: Any written documentation or paperwork associated with the movement of goods. Documents like proof of delivery (POD), invoices, and bills of lading (BOL) live here.
• Duties and taxes: For international shipping, certain regions and products are subject to tariffs through customs processing. The breakdown of duties and taxes is a major cost consideration for any international shipper, whether exporting or importing.

Precise freight accounting stems from accurate data, centralized systems, and proper governance. Unfortunately, achieving this level of precision is difficult when a single freight company must track multiple systems, sources, and documents to account for every stop of the freight’s movement, and thus its expected cost for a single shipment.

Each document contains important data that governs how freight accounting can be optimized in the future. Documents can include bill of lading (BOL), proof of delivery (POD), rate confirmation, permits, hazmat documentation, weight tickets, wash certificate, and more. In international shipments, ocean and air, the number of documents is two to three times that of road freight. To get a clean picture of costs, teams need to standardize and centralize all this data.

Pro tip: Don’t forget about freight-on-board (FOB) points when assessing freight costs. If a buyer wants more control over the transportation process, a shipper may send the goods to an FOB destination. The location marks a transition in ownership of goods. It’s essential to capture because it impacts your overall cost of shipping.

With so many moving parts, there’s an increased likelihood of errors. It’s important to know the most common ones and how to identify them.

What are the most common mistakes in freight accounting?

Freight networks are complex, so it’s easy to miss minor errors or details. Here are the most common mistakes in freight accounting.

• You are not centralizing your freight data. Several different teams are involved in a single payment process. The carrier contract goes to the transportation manager, while the invoice goes to accounts receivable (AR). If supporting documents live separately, there is a lot of time-consuming back and forth between these two teams.
• You don’t correctly assign freight costs to GL coding. There is a greater risk of payment errors when freight is inaccurately assigned. Your profit and loss statement (P&L) may indicate good margins when it’s actually in the red.
• You don’t have transparency into the payment cycle. This lack of visibility eats into the profits of freight payment providers who pay via check or don’t provide check settlement dates.
• You are not optimizing when you pay invoices. If you pay too early, you reduce the working capital you have on hand. If you pay too late, you incur late-payment fees and risk damaging carrier relationships.
• You don’t have a process in place to account for unapplied cash and refunds. Managing adjustments is hard but cash is left on the table by not accounting for unapplied credits or carrier refunds.
• You don’t leverage performance during carrier contract negotiations. High-performance and accuracy should be taken into account during contract negotiations. Carriers want to partner with a reliable shipper.

Improved freight accounting entails resolving these common errors. By collecting high-quality data, you know precisely where inefficiencies live in your current process. The next step is optimizing it.

5 tips to improve freight accounting and boost profitability

1. Centralize freight data to ensure accuracy

Solution for: A lack of standardized data and inaccurately assigned GL coding.

Centralized data gives you a comprehensive view of your freight costs. Transportation, manufacturing, and warehousing costs – it’s all information that should live in one accessible place.

Logistics-AI software is the quickest and most reliable way to ensure data accuracy. It’s purpose built to fit into your existing workflow, extracting data from disparate sources and storing it all in one place. The result? Complete insight and control over your freight spending.

Here’s how intelligent software ensures your freight data is accurate:

• It ingests, cleans, and standardizes freight data from disparate sources. In doing so, it transforms messy metrics into an organized data set.
• It consolidates duplicate data points when carriers use different codes for a single accessorial or bill list item.
• It correctly and automatically connects freight costs to the appropriate GL codes.
• It allows you to proactively monitor days payable outstanding (DPO) to understand how long it takes to fulfill payments.

Pro tip: With centralized freight data, tracking the status of unapplied cash is easier. Whether it’s carrier discounts or overpayment credits, these funds can help reduce your bottom line. You often must advocate for those funds to appear on your account. Data gives you the ability to do so.

2. Gain insight into the entire payment cycle

Solution for: A lack of transparency into the payment cycle.

When you know precisely where each payment is in its lifecycle, you can accurately optimize when you pay. Intelligent freight payment software manages payment scheduling and orchestration for you.

When you centralize freight data using freight audit and payment software, all payment data is at your fingertips. This lets you access real-time accrual reports and have confidence that you’re looking at an accurate picture of the company’s finances.

Now, you can use these insights to accurately track incurred but not yet completed payments. This knowledge allows you to properly budget and manage costs as cash moves in and out of your accounts.

This visibility reduces the risk of information gaps – mistakes that could be the difference between being profitable or not. With premium data at your fingertips, you have more control over your profits.

3. Optimize when you pay invoices

Solution for: Paying invoices too late or too early and losing working capital.

You don’t want to make payments too late, as you risk incurring late-payment fees and having your account sent to collections. But you also don’t want to pay invoices too early and reduce cash on hand.

Software such as Loop helps by accurately aging invoices. It keeps the payment process moving by instantly conducting invoice audits upon receipt. If an invoice is validated, Loop automatically makes the payment at term.

When you optimally manage freight payments, you’re balancing good carrier relationships and increasing working capital. You can streamline payments and boost your financial control to excel at both.

4. Digitize payment methods to reduce risk

Solution for: A lack of financial insight that leaves money on the table.

Despite 60% of freight transportation companies still relying on paper checks, Shippers are increasingly switching to digital payments. Paper checks sent via mail are more likely to get lost or be delayed. It’s not an efficient method if you’re trying to optimize payments.

So, how do digital payments reduce risk?

• Fraud prevention: Additional security features like multifactor authentication protect digital payments.
• Improved visibility: Using software to manage payments lets you track them in real time. Doing so gives you essential insights into your cash flow.
• Instant reconciliation: You can quickly validate the accuracy of invoices by matching them with their supporting documents.

Taking steps toward reducing payment risk ensures you optimize freight spend. You can feel confident that you have full control over where each dollar goes. And, in doing so, you’re unlocking key opportunities for cost savings.

5. Leverage performance during contract negotiations

Solution for: Not taking advantage of negotiation leverage as it pertains to performance.

It’s commonplace for a shipper to take a carrier’s performance into account during contract negotiations. Anything from on-time delivery percentages to undocumented accessorials are taken into consideration. However, a shipper can also use their exceptional performance as leverage.

Carriers want to partner with shippers they can trust. A shipper who sticks to scheduled delivery times, provides clean operations for drivers, and is easy to work with is a valuable business partner. If you have a proven track record of being a Shipper of Choice, use it to your advantage.

Streamline freight accounting and unlock profit with Loop

Loop is a unified, reliable system for your freight accounting data. It leverages industry AI to audit invoices to streamline discrepancy reconciliation instantly. It will also handle payments, using quick pay to ensure payment accuracy and expediency.

With premium data at your fingertips, you can optimize freight accounting and boost profits. Get in touch with Loop today to improve spending visibility and control costs.