Transforming Accrual Management into a Cornerstone for Success
Managing freight accruals is one of the most complex supply chain processes, requiring long hours and many resources. Considering that freight can amount to as much as 10% of a product’s total cost, depending on the region and how costs are accounted for, it’s clear why accurately paying accruals is important to your bottom line.
The ambiguity that comes with freight accruals leads most companies to fix an estimated amount of the total cost of goods sold (COGS) as freight costs, usually the aforementioned percentage. This guesswork can prove problematic, especially in times of uncertainty. For example, the COVID-19 pandemic and the beginning of its impact on the economy showed that in March 2020, there was a decrease in global air freight capacity by 22% compared to March 2019. This induced a hike in prices. In such cases, freight accruals become a nightmare.
The most common methods of processing freight accruals can induce losses and tie up funds and resources that could otherwise be used to grow the company.
What are Freight Accruals?
Freight accruals are a method of tracking and calculating shipment costs that haven’t yet been billed. Most companies accrue through setting an estimate, along with a buffer to account for variances. Then they wait for invoices to arrive, and compare estimates versus actual costs in order to settle payments.
Challenges and Risks of Freight Accruals
The ambiguous nature of freight accruals means that, unless based on an objective and data-driven approach, it’s mainly built upon assumptions or past experiences. This brings with it a plethora of challenges, such as:
- Delayed, low, or no visibility into booked vs actual accrual variances—Estimating cost and waiting for the real number to arrive can be quite problematic. Many accounting departments hold payments until the delivery stage of a shipment. Yet, delivery may occur much earlier than the invoice issuance, something which the accounting team wouldn’t know. This leads to funds being tied up longer than necessary, which hurts cash flow. It’s a recurring problem, as only 49% of supply chain managers can capture real-time data insights and act on them.
- Manual processes—Processing freight accruals manually, although the norm in most companies, is a tedious task. Manually compiling data from numerous suppliers and varying transportation modes, and then matching it against outbound shipments to determine accruals can take days or weeks, especially if done through tedious methods such as spreadsheets.
- Shipped but not invoiced—Shipments are usually dispatched before being invoiced. This commonly leads to accruals being based on estimates at the time of shipment origination rather than the invoice, which occurs later. It then triggers an offsetting of general ledger entries. This creates a haze of cost calculations, as any change in circumstances during the voyage will alter the cost. Estimating for shipments en route without real-time data can prove to be a nightmare.
- Incomplete estimates—If any accessorials, such as fuel surcharges, redelivery, diversion miles, or otherwise, aren’t taken into account, it creates a mess in your estimates. Factor in the parameters to rate for all modes of transport—too many subpar estimations lead to harm to your profit margins.
- Global variances—One of the biggest challenges to account for are global variances. The variables arise and the diverse data piles up, becoming even more convoluted. Most companies have an ERP or transportation management system in place to help with this matter, but a one-size-fits-all solution can’t remedy the root of the problem.
- Using too old or inaccurate data—Data is vital in transportation, as it permits you to perform analyses, create readable reports, and make savvy business decisions. But using obsolete historical data or inaccurate data will skew your estimations and leads to poor business intelligence.
- General ledger coding changes—General ledger codes (GLCs) are always susceptible to change. They could be one code at the initial time of estimation, and then a different code at the time of invoicing. This means a lot of rework and backtracking.
All these challenges can lead to going over or under budget. Both of these outcomes are problematic. Too high of a budget ties up funds that could’ve been used in pursuing other profitable opportunities. Not enough budget, on the other hand, can hurt your financial standing through unforeseen expenditures and greatly impact your cash reserves and bottom line.
Trax will help you walk that fine line.
Steps to Trustworthy Accrual Reporting
To effectively master accrual reporting, you must consider five imperative steps. A summary of these steps are:
- Shipment file integration—Accrual visibility starts with the receipt of shipment data through many mediums. Consolidating it in a single-source platform should be your first step.
- Rate management—Due to the complexity of managing rates through multiple modes and data structures, you must optimize your rate management. Optimal rate management leads to proper accrual management—being able to accrue with the accurate and current rate leaves no room for error or guesswork.
- Document matching—Matching the shipment and all its details to the invoice brings to light the actual versus estimated cost, which is vital for visibility of expenses.
- General ledger coding—Once you have an estimated shipping price, apply a preliminary coding to the shipment. This will help you when the invoice arrives, as GLCs change frequently, so it’s likely that the estimate GLC won’t match the invoice GLC.
- Accrual reporting—With more data acquired in Steps 1-4, as well as your KPI data, you can create detailed and informed accrual reports to guide your business decisions.
Trax Can Help Optimize Your Accruals Management
Trax’s Transportation Spend Management Maturity Model is a framework that provides a roadmap for large, global enterprises to shift from a lack of visibility and control to a fully optimized and accurate data-based transportation supply chain—for all modes and geographies.
As you journey through the stages of this model, your accrual management—and other areas of your Transportation Spend Management—shifts from assumption to anticipation to maturation. Stages of Trax’s Transportation Spend Management Maturity Model are:
- Proactive—Companies respond to issues as they arise, but eventually begin to plan and anticipate matters that lay ahead.
- Optimizing—Accurate and high-quality data is obtained and analyzed, offering a company better visibility and the ability to make informed decisions based on data rather than assumptions.
- Leading—A company at this stage is fully capable of weathering challenges and using them to their advantage. These companies have aptitude, capabilities, visibility, control, and optimized operations. They become pioneers of the market, leading change and innovation while growing their market share and cutting costs.
The Trax Transportation Spend Management Maturity Model can transform your freight accrual process, making a powerful impact the following areas:
As data from a multitude of carriers and modes flows into different platforms, it becomes extremely difficult to untangle the web of information.
Through implementing robust Transportation Spend Management processes, all carrier data smoothly flows into a centralized location. Data becomes easy to read and analyze, making for more accurate invoice and shipment record matching.
Furthermore, our software offers a combination of shipment-specific accrual estimates and rates, along with historical accruals (including accessorials), to deliver a one-stop-shop for all of the information needed to increase your visibility and control over freight accruals.
Visibility is a cornerstone of a strong supply chain. By 2023, an estimated 50% of leading enterprises worldwide will have adopted real-time visibility solutions, which are crucial for successful freight accruals. Estimating by mode or carrier is a tough task, and doing it accurately is even tougher, unless if you have a good view of historical and real-time figures.
Implementing Trax’s Transportation Spend Management practices allows you to compare shipment price estimates against actual costs, be it by carrier or mode. And, you can accurately identify, prioritize, and quickly resolve issues that create accrual variances. The higher quality of data you have, the higher the visibility, which means more objective and better data-based decision making.
A difficult aspect of freight accruals happens in the accounting departments. It can be extremely challenging to track shipments in real-time and understand the different costs coming in at every particular stage. In turn, this sets the stage for surprises when invoices arrive.
We help you get real-time data and analysis of accruals, so you know whether it’s rates, weight issues, market volatility, tariffs, fuel surcharges, or otherwise, driving your accruals. This knowledge allows you to rapidly course correct and make informed decisions that ultimately save you money and time.
Manual processing is far from the ideal approach for freight accruals. It’s error prone, time consuming, resource exhausting, and overall inefficient. With better quality and quantity of data, the manual process can be automated, freeing up resources to better analyze and optimize spend instead of compiling data all day.
Reporting is one of the most crucial steps for a company’s growth and prosperity. What you see, you can control. The better the insight into your processes and data, the better control you have to make smart business decisions and grow your company.
Through consistent cost allocation, accurate shipment data consolidation, solid match percentages, and an auditable process in place, reporting becomes streamlined. You can issue a variety of reports: match metric, price estimation, shipped but not invoiced, invoiced but not booked, and estimate versus actual variance. This robust reporting system delivers an unparalleled stream of business intelligence, helping you to become a leader in your marketplace.
Bolster Your Transportation Spend Management for Success
Through optimizing your processes, the tedious task of accruing freight becomes more streamlined, less resource consuming, and more risk-averse. Achieving better visibility, comprehensive control, and a robust processing methodology elevates your freight accruals to no longer be a thorn in your side, but a cornerstone to your success.
To learn more about optimizing your freight accrual process, or even your entire supply chain management, contact Trax today.
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.