Nearly every shipper who transports freight faces the same issue: how does your finance department account for shipping, logistics, and delivery costs? If you're like most shippers, you set aside a percentage of a good's value or a cost of goods sold (COGS). For each shipment, you typically allocate X% (usually 10%) of the total COGS as the debit balance. You note decreases as credits and increases as debits. This process is known as freight accruals.
Freight accruals may seem simple, but they involve complex events. These events must occur for a shipment to be received and accounted for properly. In short, freight accruals require oversight.
3 Things Accounting Needs to Know About Freight Accruals
Dynamically Track Freight Costs
Many general accounting departments lack knowledge of freight billing intricacies. They often use a set percentage to determine freight accruals. Let’s say that percentage is 10%. What happens when market conditions change and transportation costs fluctuate? For example, this year, the spot rate trucking market has risen by 28%. Large shifts in freight pricing can distort projections and lead to much higher accruals.
Freight accruals don’t only cover transportation costs. When you receive an invoice, additional information—such as charges for unplanned logistics expenses—may change the shipment cost. Since these final charges likely won't match the standard 10%, your freight accrual ledger may remain inaccurate.
If a shipper or transportation management firm records all costs dynamically during a shipment's lifecycle, the final shipment invoice will reflect the final freight accrual. Having an accurate freight accrual can free up revenue and limit financial risk.
For insights on how CFOs can enhance supply chain efficiency through freight audits, check out our blog on Strategic Cost Reduction for CFOs: Freight Audits’ Role in Enhancing Supply Chain Efficiency. This resource explores the critical relationship between cost management and logistics oversight, empowering CFOs to make informed decisions.
Stay Informed About Shipment Locations
Many accounting departments reconcile their freight accruals upon delivery. Unfortunately, they often don’t receive timely notifications about deliveries. This oversight causes accruals to age, tying up revenue and distorting financial projections.
If accounting enters freight charges as they change during each shipment stage, they can monitor each shipment's location throughout the supply chain. In addition to tracking costs, they can update other key data, such as transit times and delivery dates. Since many companies close out their freight accruals upon delivery, it’s crucial for accounting to know exactly when that occurs.
Collaborate with a Trusted Partner
With escalating freight costs, your accounting team must remain vigilant in managing freight accruals. Optimizing freight accounting practices can save you a substantial percentage on every single freight shipment, whether inbound or outbound. The more accurate your records, the more opportunities for savings arise.
Fortunately, they don’t have to navigate this process alone. A trustworthy managed transportation partner can assist your accounting team in maximizing efforts and bridging the gap between finance and logistics. This partner can also provide freight bill auditing and generate custom reports that enhance your bottom line. Let them put your data to work for you.
For insights on how CFOs can enhance supply chain efficiency through freight audits, check out our blog on Strategic Cost Reduction for CFOs: Freight Audits’ Role in Enhancing Supply Chain Efficiency. This resource explores the critical relationship between cost management and logistics oversight, empowering CFOs to make informed decisions.
