April 11 2024 | 7 Min Read

Freight auditing vs settlement and payment: Differences and similarities explained

Posted By
Wendy Mackenzie
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Freight auditing vs settlement and payment: Differences and similarities explained

One cent. Two percent. Three shipments. Four errors. Five…

Counting when you aren’t able to compare cold data points is hard. What does a cent have to do with percent, and why do we care what errors exist?

Finding value in the data can be nuanced, and it's even harder to recognize the actual meaning behind what could appear to be a random number. In logistics, there are ample opportunities for error with many combinations between both quantity and object.

Freight audit and payment is only one part of everything that goes into effective transportation management. It may have multiple acronyms (FBAP and FAP), but it’s always maddening. There are also settlement-related processes that are more closely related to payment than an audit, and you need to know where each begins, ends or even blends.

That distinction is where freight audit services bring massive value in logistics business intelligence, but it’s also fraught with confusion. Let’s clear the air by digging into freight auditing versus settlement and payment.

What is a freight audit?

Freight auditing is a powerful tool for shippers to reduce operating expenses. It’s an intense process of comparing each detail listed on a freight bill to the original tendered load. It includes reviewing the rates, charges, accessorials, class, pickup and delivery dates.

If the bill doesn’t match up, shippers can file for a retroactive adjustment with a carrier. That can add up to big savings over time. But it’s a laborious process. It’s more than just comparing the errors to some random data points but rather, it’s an ongoing process to recognize any duplicate invoices and know when a carrier has incorrectly billed something. This makes it impractical to try to manage and audit invoices manually. That’s why there’s an entire part of the transportation SaaS industry dedicated to automating the process. In fact, according to Ryan Polakoff of Supply Chain Brain, “the global freight audit and payment market was valued at $3.1 billion in 2019, and is expected to grow at a compound annual growth rate of 6.8% from 2020 to 2027.”

warehouse workers reviewing freight audit results

But why is it so costly? Well, let’s just think about the seemingly simple process of auditing 100 freight bills. Looking solely at the rate, class, pickup, and delivery dates, we have four potential variables for every invoice. There are 18 potential classes of freight, and if we looked at only two carrier rate sets, we now have 36 potential errors for that variable alone. Pair that with two date differences, and potential surcharges, it’s easy to see how that 36 variable can scale into 72, 144, and beyond. But here’s the thing to know.

In this example, we didn’t extract potential variations from all 100 invoices. Instead, we’ve extracted the variations for two (2) invoices, so it’s possible that we’re looking at more than 1000 data points in analyzing just this small set of invoices. Scale that across multiple locations, and you’ll find yourself quickly getting lost in the minutiae of the data.

Freight auditing is the process of transforming that data into something more digestible and manageable with automation to understand and identify the potential discrepancies faster than humanly possible.

What is freight settlement?

Freight settlement is technically a process that occurs at the start of handling a freight bill. It’s the process by which a shipper finalizes the agreement with a carrier and submits payment. However, and depending on the systems in use, settlement typically occurs at the time of tendering. Unfortunately, settlement can be even more confusing in that shippers could be “settling” on an invoice, i.e., submitting payment, even if the invoice billing details are inaccurate.

In a sense, settlement is the process of completing payment in accordance with the terms of the tender itself. But, the literal process of sending payment to the carrier is known as freight bill payment.

Where do they fit together?

It’s not surprising that so many shippers still reference freight audit, settlement and payment as one process. They are all essential financial components of completing the administrative transaction behind a load. However, technology is changing the game and has made it possible to proactively audit invoices before submitting payment. The problem is that carriers are expecting payment on set terms. And if the payment isn’t submitted, even if a glaring error exists, shippers may find themselves without a carrier to move their loads.

This was actually a possible issue covered in a prior Situation File where an auditing software, part of the IL2000 tech stack, uncovered problems in freight classification. The IL2000 team made the decision to withhold payment pending a rerating and correction from the carrier.

That’s not necessarily a settlement process or an auditing process on its own. It’s a blending of all three audit, settlement and payment processes into one solution, and that’s the trick to making sense of FBAP, FAP or any other acronym you may encounter in dealing with freight billing practices.

Improve your freight audit, payment, and settlement process with IL2000

person traveling through sea of freight audit bills spread over the water

Freight auditing, payment, and settlement can feel very different, but they are actually and will always be closely related. Shippers that take the time to recognize where these processes begin and end will be in a better position to improve their supply chain’s profitability and keep excess freight spend at bay.

Speak with an expert in FBAP at IL2000 to chart a course to freight savings and sail through the ocean of paperwork without a ripple. 

 

Topics: Logistics Management, Transportation Models, Business Intelligence, Freight data, Supply Chain Optimization

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