What Is A Freight Audit & Why Does Your Business Need It?

Efficiency in the realm of shipping is a necessity for businesses dependent on timely deliveries. At the heart of this efficiency lies the critical practice of freight audit. 

This often-overlooked process is a safeguard against potential revenue loss and operational pitfalls. Neglecting the intricacies of auditing can translate into significant financial setbacks and operational burdens. 

In this exploration, we delve into the core of freight audits, understanding why they are indispensable for businesses navigating the complexities of shipping logistics, so let’s get right in!

What is a Freight Audit?

A freight audit serves as a checkpoint that ensures accuracy and transparency in financial transactions related to transportation. Essentially, it involves a systematic examination of freight bills, invoices, and associated documents to validate charges and identify discrepancies. 

Freight audits are essential for maintaining financial accuracy and ensuring that shipping costs are kept in check, particularly in a landscape where freight costs can fluctuate significantly due to various factors, including fuel prices and changes in carrier rates.

This process safeguards businesses from overpayments, billing errors, and potential financial leakage and includes everything from verification of charges to analysing outsourcing options.

Key Freight Audit Terms To Know

Understanding key terms related to freight audits is essential for navigating the complexities of transportation costs and ensuring accurate billing. Here are some important terms commonly associated with freight audits:

1. Freight Audit and Payment (FAP)‍

This term refers to the comprehensive process of auditing freight bills and managing payments to carriers. It encompasses verifying the accuracy of charges and ensuring compliance with contractual agreements.

2. Freight Payment‍

This is the process that dictates how accounts payable are handled for transportation invoices. After verifying the accuracy of charges, shippers can proceed with payment. If discrepancies are found, shippers may adjust the payment or seek clarification from the carrier.

3. Rate Tolerance‍

This term describes the acceptable range of variance in freight charges that shippers are willing to accept. Discrepancies within this tolerance are usually not challenged, but those exceeding it are flagged for further review.

4. Cost Savings Approach‍

This auditing strategy focuses on identifying ways to reduce transportation costs directly, positively impacting budgets and invoices.

5. Cost Avoidance Approach‍

Unlike the cost savings approach, this strategy emphasizes actions that prevent additional costs from being incurred. It may not directly affect financial statements but helps ensure that invoiced amounts align with original quotes from carriers.

6. Freight Bill‍

This is the invoice provided by the carrier, detailing the total charges for the shipment. It is the primary document reviewed during the audit process to verify that the charges are accurate and justified.

7. Self Billing

A method where shippers calculate their freight costs and instruct the carrier to invoice them based on those calculations. This shifts the responsibility for accurate billing from the shipper to the carrier.

Why Is a Freight Audit Important for the Logistics Industry?

The role of a freight audit extends far beyond a routine check. It is crucial for the seamless operation of shipping and receiving goods. 

Let's dissect the significance of freight audits and understand why they've become non-negotiable in the realm of logistics precision.

1. Cost savings

In the fiercely competitive business landscape, every penny counts. A freight audit acts as a financial watchdog, identifying overcharges, errors, and unnecessary costs. It's about optimizing your expenditure to enhance the overall profitability of your logistics operations.

2. Accuracy and compliance

Precision matters. Freight audits ensure that each transaction aligns with the agreed-upon terms, mitigating billing discrepancies and fostering compliance with contractual obligations. 

This accuracy not only prevents financial discrepancies but also enhances the overall reliability of your logistics processes.

3. Process efficiency

Efficiency is the heartbeat of logistics. By streamlining billing processes and validating charges, freight audits eliminate bottlenecks, reducing the risk of delayed shipments and enhancing the overall efficiency of your supply chain.

4. Visibility and transparency

The lack of visibility can be a logistical nightmare. Freight audits bring transparency to the financial aspects of shipping, providing a clear view of expenses. This transparency is not only essential for internal financial control but also for building trust with stakeholders and partners.

5. Supplier relationship management

Healthy relationships are built on trust. A freight audit instills confidence in your relationships with carriers and suppliers by ensuring fair and accurate transactions. This, in turn, strengthens partnerships, fostering a collaborative and reliable network within the logistics ecosystem.

6. Claims and Dispute Resolution

‍Discrepancies, disputes, and claims often arise during the freight invoicing process. By performing a freight audit, businesses can quickly identify and resolve these issues. Engaging in dispute resolution helps businesses correct billing errors, achieve favorable resolutions, and prevent financial losses or damaged relationships with carriers.

Freight Audit Process

Embarking on a freight audit involves navigating a structured process that dissects every aspect of your shipping transactions. Let's break down these 9 steps, providing clarity on each pivotal phase.

1. Document verification

At the outset, meticulous scrutiny of shipping documents is imperative. This includes bills of lading, shipping manifests, and other relevant paperwork. 

The aim is to ensure that all documentation aligns with the actual shipments, verifying the accuracy of recorded information.

Check for completeness and accuracy in sender and recipient details, and verify the consistency of information across all relevant documents.

2. Rate verification

Rates form the financial backbone of shipping transactions. In this step, the focus is on confirming that the agreed-upon rates with carriers match the invoiced rates. It's a critical checkpoint to prevent overbilling and ensure adherence to contractual terms.

Cross-check contracted rates against the rates invoiced by carriers. Scrutinize any deviations and ensure proper documentation for negotiated rates.

3. Accessorials and special charges review

The devil often lurks in the details, especially when it comes to accessorials and special charges. This step involves a meticulous review of additional charges beyond standard shipping rates, ensuring they are valid and in line with contractual agreements.

Verify the legitimacy of accessorials and special charges, and confirm that any extra services or unique circumstances warranting additional charges are well-documented.

4. Freight class and weight confirmation

The accurate classification of freight and confirmation of its weight are pivotal for precise rate calculations. This step involves scrutinizing the assigned freight class and ensuring the recorded weight aligns with the actual shipment.

Confirm that the assigned freight class accurately represents the shipped goods. Scrutinize recorded weights, preventing miscalculations that could lead to inaccurate charges.

5. Duplicate charge check

Redundant charges can significantly impact your bottom line. This step involves a thorough examination to identify and rectify any duplicate charges, ensuring you only pay for services rendered.

Examine invoices for instances of double billing or duplicate charges. Confirm that any discrepancies are addressed with the relevant carriers for timely resolution.

6. Tax and duty verification

Taxes and duties are intricate elements that require meticulous attention. This step involves verifying the accuracy of applied taxes and duties, preventing financial discrepancies and ensuring compliance.

Scrutinize invoices for accurate application of taxes related to the shipment. Verify that duties, if applicable, align with regulatory requirements and agreed-upon terms.

7. Payment reconciliation

Purpose: The reconciliation phase ensures that the final payment aligns precisely with the audited and approved charges. It involves cross-referencing the audited data with the payment records to guarantee accurate and fair compensation for services.

Cross-reference audited charges with payment records to identify any discrepancies. Swiftly address and rectify any disparities to ensure fair and accurate compensation.

8. Communication with carriers

Open and effective communication with carriers is essential for addressing discrepancies, resolving issues, and maintaining strong partnerships. This step involves clear dialogue to confirm details, negotiate rates, and resolve any outstanding matters.

Communicate with carriers to verify any questioned charges or discrepancies. Discuss and negotiate rates or disputed charges for resolution.

9. Continuous monitoring and improvement

A freight audit is not a one-time task; it's an ongoing commitment to process enhancement. This step involves establishing a system for continuous monitoring, analysis, and improvement to adapt to evolving logistics needs.

Implement a schedule for regular audits to ensure sustained accuracy in financial transactions. Analyze audit outcomes to identify areas for process improvement and implement changes as needed.

Freight audit best practices to follow

Adhering to best practices is instrumental for navigating the complexities of freight audits. These practices not only enhance the efficiency of your audit processes but also contribute to the overall resilience of your logistics strategy. 

Let's delve into the practical application of these principles to help you optimize your freight audit endeavors.

1. Establish clear contract terms

Clear and well-defined contract terms form the bedrock of a successful freight audit strategy. By establishing precise agreements with carriers regarding rates, accessorial charges, and other pertinent details, you create a foundation for transparent transactions. 

For instance, outlining specific expectations for documentation and billing practices in contracts can significantly reduce ambiguity, facilitating a smoother audit process.

2. Standardize processes

Consistency is key in the world of freight audits, and standardizing processes across your logistics operations is a best practice that can't be overstated. 

By developing and adhering to standardized procedures for document submission, data verification, and communication protocols, you not only streamline the audit workflow but also minimize the likelihood of errors.

3. Utilize technology and automation

In the digital era, leveraging technology and automation is a game-changer for effective freight audits. Implementing robust software solutions and automation tools not only expedites the audit process but also enhances accuracy. 

For example, automated data matching systems can quickly identify discrepancies, reducing the manual workload. Integrating technology into your audit strategy not only keeps pace with industry advancements but also positions your logistics operations for increased efficiency and precision.

4. Regularly update contracts

Contracts in the logistics realm are not static documents but should evolve to meet changing business needs and industry dynamics. 

Regularly updating contracts ensures that they remain aligned with market conditions, regulatory changes, and the evolving needs of your business. 

For instance, incorporating periodic rate reviews and adjustments into contracts can help adapt to fluctuations in the market, fostering a more agile and responsive logistics strategy.

5. Collaborate with stakeholders

Effective collaboration is a cornerstone of successful freight audit practices. Engaging in open communication with carriers, suppliers, and internal teams fosters a collaborative environment. 

For instance, involving carriers in the audit process can provide insights into operational challenges, leading to mutually beneficial solutions. Collaboration ensures that all parties are on the same page, promoting transparency and minimizing potential disputes.

6. Implement a dispute resolution process

Disputes are an inevitable part of the logistics landscape, and having a well-defined dispute resolution process is essential for timely conflict resolution. 

Establishing clear protocols for addressing discrepancies, such as a designated point of contact or an online dispute resolution platform, ensures that issues are addressed promptly. 

A robust dispute-resolution process not only prevents prolonged conflicts but also contributes to a more efficient and trustworthy logistics ecosystem.

7. Maximize the use of electronic invoicing

Encourage carriers to use electronic invoicing to eliminate data entry errors and expedite the invoice receipt process. Electronic invoices provide more detailed data for audits, leading to more accurate cost allocations and fewer exceptions that require manual review. 

This streamlines the audit process and ensures more precise financial management.

8. Implement a robust data management system

Utilize a comprehensive data management system that allows for easy access to historical freight data. This system should facilitate the tracking of trends, discrepancies, and invoice accuracy, providing valuable insights for future audits and decision-making. Consistent data management also supports better strategic planning and operational efficiency.

9. Leverage the value of data

Ensure you are fully utilizing the data captured through the freight audit and payment process for reporting, analytics, and business intelligence. 

Use the data to identify savings opportunities, optimize routing and mode selection, measure and manage carrier performance, provide accurate accruals and forecasting, and allocate freight costs to the proper cost centers. 

Leveraging this data effectively will enhance the return on your freight audit and payment investment.

10. Implement continuous analysis and monitoring

A proactive approach to freight audits involves continuous analysis and monitoring of your logistics processes. Regularly reviewing audit outcomes and performance metrics provides valuable insights into areas for improvement. 

For example, analyzing historical audit data can reveal patterns of errors or inefficiencies, allowing for targeted improvements. 

By embracing a culture of continuous analysis and monitoring, logistics operations can adapt to changing requirements and continuously enhance their overall efficiency.

Pre-Audit Preparation Before Freight Audit

To effectively prepare for a freight audit, it is essential to follow a structured pre-audit preparation process. Here are six key steps to ensure a smooth and efficient audit:

1. Gather documentation‍

First, collect all relevant shipping documents, including bills of lading, carrier invoices, contracts, rate sheets, and supporting paperwork. Having complete and organized documentation will facilitate the audit process and help in verifying charges against contractual agreements.

2. Review contracts and agreements

Next, thoroughly examine contracts and agreements with carriers. Pay attention to the agreed-upon rates, terms and conditions, pricing structures, and accessorial charges. Understanding these elements is critical for identifying any discrepancies during the audit.

3. Establish audit objectives‍

Define the specific objectives of the freight audit. Objectives may include rate verification, checking accessorial charges, assessing service levels, and ensuring compliance with contractual obligations. Clearly defined goals will guide the audit process and help prioritize tasks.

4. Determine audit scope‍

Specify the audit's scope by deciding on the time period to be reviewed, which carriers to include, and whether to audit all shipments or a sample size. Factors like shipment volume and carrier performance should be considered when determining the scope.

5. Create audit checklists‍

Develop checklists or templates to ensure consistency during the audit. These can include rate verification, accessorial charges, service level compliance, and documentation accuracy. Standardized checklists help maintain thoroughness and accuracy throughout the audit process.

6. Allocate resources‍

Finally, identify and allocate the necessary resources for the audit, such as personnel responsible for conducting the audit, technology and tools for data analysis, and timeframes for completing the audit. Assigning dedicated staff will enhance the efficiency of the audit process and ensure that any discrepancies are promptly addressed.

By following these steps, shippers can better prepare for a freight audit, leading to improved accuracy in billing and potential cost savings.

How FreightFox’s Audit and Payment Module Optimize Logistical Operations

The call to action is clear: integrate these practices into your logistics playbook. 

The potential for cost savings, enhanced accuracy, and improved supplier relationships is too impactful to ignore. Whether you're fine-tuning an existing strategy or starting afresh, consider the implementation of freight audits and payment processes as a pivotal move towards logistics efficiency. 

By embracing these practices, you not only safeguard your bottom line but also elevate your logistics operations to meet the demands of a dynamic and competitive market. 

Take the proactive step today, ensuring that every shipment contributes not just to delivery but to the sustainable success of your business.