How the Right Freight Audit and Payment Program Can Streamline the Finance Function
Freight costs account for a significant source of expenditure in the financial supply chain; experts estimate it to be between 7-9% of the Cost of Goods Sold. These costs can be hard to oversee, which represents a key point of frustration for people who lead the finance function. One of the only ways to uncover valuable data and unravel the complexity of contracts, billing, and payments is to implement a freight audit and payment (FAP) program. Not all of these programs are created equally and must include certain features to yield maximum benefits. Read on to learn:
- The basics of freight audit and payment processes
- The risks you face with a poor FAP process
- The challenges in freight audit and pay
- How a refined FAP system mitigates risk and provides additional benefits
The team at Trax provides elite, streamlined services to some of the world’s most successful global brands. To learn more, contact us today.
What is Freight Audit and Payment?
Freight audit and payment includes the tasks it is named for:
Freight audits are conducted as part of financial business operations. Freight audits certify that the charges on a transportation invoice from a carrier are accurate and valid for payment by a shipper. This process ensures that the data in the transaction meets the requirements of both parties and provides insights into broader supply chain business processes.
Freight payments broadly refer to accounts payable services for transportation invoices. Freight payment may include activities from third-party vendors, and also covers receipt of goods, invoice processing, and payment of freight invoices. On time payments are a point of focus for all industries, but shouldn’t come at the expense of meticulous freight audits.
Freight audit and payment systems refer to collective activities, encompassing invoice collection from freight invoice audits, physical payment to carriers, and more. Sophisticated software systems exist that can manage many of these tasks to a high degree of accuracy, alleviating the burden of manual processes and streamlining operations.
A refined FAP system benefits finance teams in numerous ways: providing cost savings, visibility into the transportation spend management process, efficiency, risk management, automation of complex tasks, reliable payment timing, and enabling cost predictions.
Freight Audit and Payments: Essential Logistics
FAP can be handled in-house or through an external FAP service.
Managing FAP In-House
Without an FAP program in place, finance leaders have to manage the freight payment process themselves. On a small scale, this may be achievable, but at greater levels of scale for enterprises with complex, global supply chains, this approach quickly grows beyond easy internal management. Driving this is the fact that FAP is subject to the economy of specialization, as well as access to information and data. The best FAP processes are managed by specialists who understand regional considerations, currencies, and other factors germane to the finance function.
One of the biggest values of FAP is that, much of the time, the initial invoice submitted by a carrier is wrong. For enterprise level businesses with global supply operations in multiple regions, this could amount to tens of millions of dollars in invoice payments that are wrong, either overpaid or duplicate paid. In-house management presents issues including disconnected data, an ever-evolving tech stack of new tools, compliance with regulations, ensuring accurate information, curbing spend, and creating accurate predictions. There can be an overwhelming lack of visibility or consistency, not to mention ever-present concerns about security gaps and risk management. Finance leaders are most concerned with avoiding surprises and closing books on time. To achieve this consistently, many use an external FAP service.
Using an Outsourced FAP Service
Most global enterprise businesses opt to use an outsourced FAP service. Freight costs have risen around the world, new trade tariffs impact import/export and trade, changing currencies continue to muddy the waters, and compliance is an endless challenge. The primary motivators for choosing an outsourced FAP service include compliance, visibility, cost reduction (audit savings), and vendor payment management. The best FAP providers can offer global expertise, multi-modal expertise, neutrality, and continuous optimization.
Every dollar that can be recovered from inefficiencies or inadequacies in the freight invoicing or payment process goes directly back to a company’s bottom line. Regular audits can save significant sums, and outsourced FAP providers are reliably knowledgeable about the latest regulatory requirements. To operate well within the rules, not to mention protecting profits, most finance leaders prefer to outsource freight audit and payment processes.
FAP is one facet of a well-rounded transportation optimization program: read more here.
Risks of a Poor FAP Process
Whether in-house or outsourced, the risks of not conducting FAP with precision are real.
Cost Errors — Cost error risks could include invoice charge errors, such as all-too-common duplicate charges and charges for undelivered shipments, as well as late payment. Under time constraints to file a claim, this kind of data is often uncovered far too late for effective recovery.
Poor Carrier-Shipper Relationship — Exacerbated by supply-chain issues, poor carrier-shipper relationships have untold implications and represent a significant risk for businesses of all kinds.
Labor Costs — For non-specialists, the steps required to build productive FAP processes can be cumbersome and take a lot of time. This adds up in terms of man-hours, as well as taking employees outside of their areas of expertise and regular work.
Fees and Penalties — Accessorial fees can add up, often being charged by freight carriers to a bill after shipment. These additional fees make it very challenging to accurately predict the full cost of shipments.
Compliance Issues — The goal of FAP is visibility, efficiency, control, and compliance. Finance leaders have a fiduciary responsibility to close books on time and create proper accruals. To do this, they need maximum visibility and oversight.
Reactive Analytics — Poor FAP robs businesses of real-time transportation analytics and insight into financials. There is a true risk of inaccurate predictions and inefficiencies when a streamlined FAP system is not in place.
Finance leaders understand the importance of paying carriers on time. Without an automated freight payment process, high-value professionals spend hours of wasted time trying to track down payment information, confirming if an invoice has been paid, investigating email chains or spreadsheets, and troubleshooting with carriers. All of this ultimately undermines productivity, and costs time and energy.
The question may feel obvious: why would anyone live with these risks? While FAP solutions exist, there are challenges to implementing them.
Challenges of Freight Audit and Pay
The risks outlined above are a point of concern both in the absence of an FAP program, and in the presence of a poorly run FAP program. For companies that have been in either scenario, implementation can be tough, for a few identifiable reasons:
- A high volume of transactions makes it hard to establish a one-to-one relationship between shipments and invoices.
- Excess required approvals and paperwork make it hard to navigate the specifics and cross-check for errors or inconsistencies.
- Invoice variability is a prevalent issue, as invoice formatting and structure shifts from carrier to carrier.
- Freight rates are inherently complex, subject to currency conversions and different terms by provider, not to mention fuel charges, accessorial matrices, and more.
- Supply chain issues exacerbate normal challenges, and no company in the world has been immune to disruptions in this space.
A study by Gartner highlighted the top priorities for finance leaders, pinpointing motivation around funding digitalization and growth, while retaining control over finances as some of the key focus areas. Invariably, the highest-ranked leaders in finance departments acknowledge the need for great technology. While the challenges for implementing better FAP are real, the benefits outweigh them.
Freight Audit and Payment Processes: Features and Benefits
The right freight audit and payment processes can not only mitigate risk, but provide game-changing benefits. Finance leaders who have plugged into the right FAP system gain transparency into processes and transactions, enhanced efficiency, time-saving automations, and greater clarity on cost. Here is an overview of how effective FAP tools can solve for the primary risks that finance teams face:
|Risks/Challenges of Outdated FAP Processes||FAP Software Solutions|
|Poor carrier-shipper relationship||Carrier relationship management|
|Labor costs||End to end visibility|
|Fees and penalties||Budget management and forecast attainment|
|Compliance issues||Defensible accrual|
|Reactive analytics||Real-time transportation spend analytics|
|Duplicate transactions||Duplicate invoice detection|
|Invoice variability||invoice data normalization|
|Complexity of freight rates||Rate management (more on Rate Manager)|
|Supply chain issues||Transportation optimization advisory services|
|Sioled data||Global visibility in the workflow|
|The Trax Difference|
|Currency conversations and tracking||Global team that understands different currencies|
|Creating and managing systems||Program managers and assistance|
Related content: FAP is one piece of a large puzzle — read about it now — Transportation management system vs. FAP.
Advanced Freight Audit Solution
Great risks and great challenges may make it hard to advance to a more refined freight audit and payment process. For active players in the finance function, however, the choice is clear: updated systems address the overarching goals of elite operations. Far beyond just catching errors, streamlined FAP processes proactively eradicate errors, with cascading impact that diminishes loss and has the twofold benefit of audit savings and hard savings. Both in the short and long-term, the right FAP solution will make all the difference.
Trax is proud to offer an award-winning, best in class freight audit and payment process. Use our FAP program, benefit from regional teams of specialists, and free your team to innovate toward a more productive and profitable future. Contact us to learn more.
Trax is the global leader in Transportation Spend Management solutions. We partner with the most global and complex brands to drive meaningful optimizations and savings through industry-leading technology solutions and world-class advisory services. With the largest global footprint spanning North America, Latin America, Asia, and Europe, we enable our clients to have greater control over their transportation performance and spend. Our focus is on your success.