Worley Blog

SHOW ME THE MONEY

Posted on: August 10th, 2022 by Clifford F. Lynch

From time to time, one of the leading trade journals publishes a feature article on Freight Bill Audit & Payment (FBAP). Supported by FBAP advertisers, to some extent it is a “puff piece”; but usually, there is some good information about FBAP firms and their capabilities. According to the recent 2022 Third Party Logistics Study, outsourcing of this function is down from previous years, but still an important and advantageous service for many firms. Keep in mind, however; that because of the amount of money that flows through the process, it is important to exercise extreme care in selecting a provider. Thorough financial due diligence is a must. If the provider does not pay the carriers, you as a client are liable for the charges, even if you have already advanced the funds. Some firms have learned this the hard way. Also keep in mind that the FBAP industry is not regulated, making it even more critical to analyze and verify.

While nothing can be outsourced without some risk, I believe there are 8 steps that, if taken, can minimize the financial risk to the FBAP outsourcer.

  1. Insist on inspecting audited financial statements – even if the firm is privately held. Don’t settle for banking information, which may be helpful but not always a relievable indicator of financial health. If the FBAP firm is financially healthy, responsible, and capable of handling the business, it will find a way of demonstrating its stability.
  2. Investigate the reputation of the auditing firm used by the provider. Things are not always what they seem.
  3. Make sure the financial statements and other documents are reviewed by qualified, client financial specialists. If the task is left to a supply chain manager with no background in finance, there is a risk he or she will overlook clues to financial problems.
  4. Check out the reputation of the senior management of the FBAP firm. Keep in mind that regardless of how good the established controls may be, they can always be overridden by senior management whose major concern will be cash flow.
  5. Ask for assurances that the firm’s financial controls are tested at least annually by an independent auditor. While privately held firms are not required to be Sarbanes-Oxley compliant, some FBAP firms have become so voluntarily. They are then subject to various tests for operational effectiveness and reporting requirements. These annual reports will be an excellent source of information about the firm and its processes and controls.
  6. Be sure that your company’s funds are not commingled with those of the provider. The typical FBAP firm’s business model requires that clients advance it the funds for freight payments, usually on a weekly basis. It then holds these funds while bills are further processed and verified, and checks or fund transfers are prepared. All funds for freight charges should be held in a separate account – preferably at a separate bank. Or if you want to be extra cautious, you can insist that the provider maintain a separate account just for your funds.
  7. Understand the float. During the delay that occurs between the time the provider receives the funds from the clients and carriers cash their checks or receive a wire transfer, the advanced funds are considered to be “floating”. Often a provider will make short-term investments with these funds before it pays the carriers. This can be particularly advantageous when the float amount is significant and interest rates are high, and there is nothing inherently wrong with this practice. However, it is important that the client be aware that this is part of the process and that it has a right to understand how its funds are being used.
  8. Do not cost- While price shouldn’t necessarily be last in importance, neither should it be the first and foremost consideration. In fact, cost should come into play only after you have ascertained that the clients meet all  your other criteria. Beware of costs that are too low. Cash flow is important to the FBAP company, and some may be tempted to quote unrealistic prices simply to obtain the float. This can be a disaster waiting to happen. In the words of the late Bob Delaney, an expert in this field, “You pay peanuts, you get monkeys.”