What is Freight Audit? Why is it Essential for Your Business?

Freight audit plays a pivotal role for businesses that depend on shipping as a means to transport goods efficiently and effectively. Many companies overlook the importance of auditing their freight bills, leading to significant losses in revenue and an unnecessary burden on their business. In this blog post, we'll explain the freight audit process, the benefits it brings to your business, and why it's worth investing in.

Freight audit entails meticulously examining and validating freight invoices along with other pertinent shipping documents to ensure their accuracy and reliability. The process includes checking the freight charges, quantity, weight, and other details. Freight audits help businesses identify and rectify discrepancies in shipping bills, which can lead to cost savings.

The freight audit process involves reviewing and validating freight invoices, ensuring accuracy in billing, and identifying any discrepancies or errors. Here are the key steps involved in the freight audit process:

1. Invoice Verification: The initial phase involves correlating freight invoices with the relevant shipping documentation, such as bills of lading or delivery receipts, to establish accurate associations.This ensures that the charges and services mentioned in the invoice align with the actual shipment details. The audit team verifies the accuracy of rates, charges, surcharges, and any applicable discounts or promotions.

2. Accessorial Charges Audit: Accessorial charges are additional fees applied to freight shipments, such as fuel surcharges, handling fees, or special services. During the audit, each accessorial charge is carefully examined to validate its applicability and accuracy. The audit team ensures that the charges comply with the agreed-upon terms and are correctly calculated.

3. Tariff Compliance Check: Tariffs outline the rates, rules, and regulations associated with shipping goods. The freight audit process includes verifying whether the invoices adhere to the tariff provisions, ensuring compliance with industry standards and regulatory requirements. This step helps identify any discrepancies or violations.

4. Duplicate Payment Prevention: Duplicate payments occur when the same freight invoice is paid multiple times. To prevent this, the audit team reviews the invoices to identify any duplicate entries or payments. They establish controls and processes to avoid duplicate payments, such as cross-checking invoice numbers or implementing system checks.

5. Exception Handling and Dispute Resolution: During the audit, if discrepancies, billing errors, or disputes arise, the audit team engages in communication with carriers and stakeholders to address the issues. They work towards resolving disputes, clarifying discrepancies, and ensuring accurate billing. This may involve negotiations, claims management, or dispute resolution procedures.

6. Data Analysis and Reporting: Following the completion of the audit, the gathered data is thoroughly analyzed to detect trends, patterns, and potential avenues for cost savings. This analysis helps businesses gain valuable insights and make informed decisions to optimize their freight management strategies. Reports are generated to provide insights into audit findings, cost savings achieved, carrier performance, and other relevant metrics. These reports help management make informed decisions and improve operational efficiency.

The freight audit process may be performed manually or with the assistance of automated freight audit systems.

A freight audit is important for several reasons:

1. Cost Savings: Freight expenditures often constitute a substantial portion of a company's budgetary allocation. Conducting a freight audit helps identify billing errors, overcharges, and unnecessary fees. By rectifying these discrepancies, businesses can achieve cost savings by only paying for the services and charges that are accurate and valid.

2. Accuracy in Billing and Payment: Freight invoices can be complex, involving various charges, discounts, and surcharges. Errors and inaccuracies in billing can lead to incorrect payments, financial discrepancies, and strained relationships with carriers. A freight audit ensures that invoices are thoroughly reviewed, validated, and reconciled with the actual shipping activities, ensuring accuracy in billing and facilitating prompt payment processes.

3. Improved Visibility and Control: Freight audits provide businesses with enhanced visibility into their transportation expenses. By analyzing audit data and reports, companies can gain insights into their shipping patterns, costs per shipment, carrier performance, and other key metrics. This visibility helps in identifying areas of improvement, optimizing transportation strategies, and making informed decisions regarding carrier selection, route optimization, and cost management.

4. Contract and Regulatory Compliance: Freight contracts typically include specific terms and conditions, such as rates, service levels, and accessorial charges. A freight audit ensures that carriers comply with these contractual agreements, preventing unauthorized charges or deviations from agreed-upon terms. Additionally, audits help businesses maintain compliance with regulatory requirements, ensuring adherence to industry standards, tariffs, and applicable regulations.

5. Claims and Dispute Resolution: Discrepancies, disputes, and claims may arise during the freight invoicing process. Conducting a freight audit allows businesses to identify and address these issues promptly. By engaging in dispute resolution processes, businesses can resolve billing discrepancies, negotiate favorable outcomes, and avoid unnecessary financial losses or strained relationships with carriers.

6. Operational Efficiency and Process Optimization: Freight audits provide valuable data and insights that enable businesses to optimize their logistics operations. By analyzing audit findings, businesses can identify process bottlenecks, areas of improvement, and cost-saving opportunities. This facilitates streamlining of operations, enhances efficiency, and enables continuous process improvement.

Here are some best practices to consider when conducting a freight audit:

1. Standardize processes: Establish standardized procedures and documentation for the freight audit process. This includes defining roles and responsibilities, documenting workflows, and creating clear guidelines for auditing freight invoices.

2. Utilize technology: Leverage freight audit software or transportation management systems (TMS) to automate and streamline the auditing process. These tools can help match invoices to shipping documents, identify discrepancies, and generate reports for analysis.

3. Verify rates and contracts: Ensure that the rates charged align with the agreed-upon contracts and tariffs. Regularly review and update rate sheets, contracts, and pricing agreements to prevent billing errors.

4. Validate accessorial charges: Pay close attention to accessorial charges, such as fuel surcharges, detention fees, or additional handling charges. Verify the accuracy of these charges by cross-referencing them with contractual terms and supporting documentation.

5. Audit carrier invoices: Scrutinize carrier invoices to identify billing errors, duplicate charges, incorrect rate application, or other discrepancies. Verify the accuracy of freight charges, weight or volume calculations, and any applicable discounts.

6. Validate service levels: Ensure that the services provided by carriers match the agreed-upon service levels. Verify transit times, delivery dates, and any other service-related parameters to ensure compliance.

7. Monitor compliance and performance: Keep track of carrier performance and compliance with contractual obligations. Measure key performance indicators (KPIs), such as on-time delivery rates or claims ratio, to assess carrier performance accurately.

8. Establish exception management: Implement a process to handle exceptions or disputes identified during the audit. Clearly define the escalation process and establish communication channels with carriers to resolve issues promptly.

9. Conduct regular reconciliations: Perform regular reconciliations between carrier invoices and internal shipping data to identify any discrepancies. This helps ensure accurate billing and provides an opportunity to address any recurring issues.

10. Analyze and report: Use the data collected during the audit process to analyze trends, identify cost-saving opportunities, and make informed decisions regarding carrier selection and contract negotiations. Generate comprehensive reports to share insights with relevant stakeholders.

Pre-audit preparation is crucial to ensure a smooth and effective freight audit process. Here are some key steps to consider before initiating a freight audit:

1. Gather documentation: Collect all relevant shipping documents, such as bills of lading, carrier invoices, contracts, rate sheets, and supporting paperwork. Having complete and organized documentation will facilitate the audit process.

2. Review contracts and agreements: Thoroughly review the contracts and agreements with carriers to understand the agreed-upon rates, terms, and conditions. Ensure that you have a clear understanding of the pricing structure, accessorial charges, and any special requirements.

3. Establish audit objectives: Define the objectives of the freight audit. Identify the key areas of focus, such as rate verification, accessorial charges, service levels, or compliance with contractual obligations. This will guide your audit efforts and help prioritize tasks.

4. Determine audit scope: Define the scope of the audit by specifying the time period and carriers to be included. Decide whether you will audit all shipments or focus on a sample size. Consider factors like shipment volume, cost, and carrier performance when determining the scope.

5. Create audit checklists: Develop audit checklists or templates to ensure consistency and standardization during the audit. These checklists can include items such as rate verification, accessorial charges, service level compliance, documentation accuracy, and any specific requirements based on your business needs.

6. Allocate resources: Determine the resources required for the audit, including personnel, technology, and tools. Assign dedicated staff responsible for conducting the audit, reviewing invoices, and resolving any discrepancies or issues that arise.

7. Implement freight audit software or systems: Consider using freight audit software or transportation management systems (TMS) to automate and streamline the audit process. These tools can help match invoices to shipping data, identify discrepancies, and generate reports efficiently.

8. Establish communication channels: Establish clear communication channels with carriers, accounts payable departments, and other stakeholders involved in the audit process. Ensure that everyone understands the purpose of the audit and their roles and responsibilities.

9. Conduct carrier briefing: Communicate the audit process to carriers, informing them about the upcoming audit and its objectives. Discuss any specific requirements or documentation they need to provide for the audit. Maintain open lines of communication to address any concerns or questions they may have.

10. Document procedures and timelines: Document the freight audit procedures, including the steps involved, timelines, and deadlines. This documentation will serve as a reference and help maintain consistency and efficiency during future audits.