Why your month-end freight number is a guess

You ship goods in March. The carrier’s bill arrives in April, sometimes in May. But the March numbers have to be final in the first days of April. So finance has to write down a shipping cost for March without seeing most of the bills.

That number is called an accrual. In plain words, it is our best guess of what we owe for the shipping we already did.

How the guess is usually made

In most companies we see, it is one of these:

• A percentage of sales. Last year shipping was 4.1% of sales, so March shipping is 4.1% of March sales.
• Last month’s number. Plus or minus a bit if you shipped more or less.
• Whatever bills came in. Which is only part of the month. So March is too low, and April is too high.

All three are quick. All three are wrong most months, and nobody knows by how much until the real bills show up. Then someone has to correct the number. The March result changes in May. Nobody likes that, least of all the head of finance who already reported March to the board.

Why it matters beyond the finance team

If the shipping number is a guess, other numbers are guesses too:

• Profit per customer. Some customers order small amounts, often, to far-away places. Shipping to them costs a lot. If shipping is spread evenly as a percentage, those customers look more profitable than they are.
• Profit per product. Heavy, bulky, cheap products cost a lot to ship. Same problem.
• Whether the carrier deal was good. You agreed a 3% lower price. Did it show up? If the monthly number is a guess, you cannot tell.

A better way

You already know what you shipped in March. Your order system or transport system has every shipment: weight, from, to, speed, date. And you have the rate card, the price list you agreed with the carrier. Put the two together and you get the expected cost of each shipment.

Add them up, and that is your March shipping number. The real shipments at the agreed prices.

When the bills arrive in April, you compare them with what you expected. If they match, fine. If they do not, either the carrier billed wrong, or the price list in your system is out of date. Both are worth knowing.

What this takes

Three things:

1. A list of shipments that finance trusts. It often exists, in the transport system, but nobody in finance has looked at it.
2. The rate cards as clean tables instead of PDFs. See what a rate card is.
3. Something that compares the two every day and tells a person when something is off.

The third part is what we build. The first two are what a Process Scan finds out about your company. Is the data there, and how far from a real number are you today?