When you sell goods and are responsible for getting them to your customer, the costs you incur for that delivery are known as freight-out. It’s a crucial aspect of your business’s finances, directly impacting your profitability. This guide will break down what freight-out means, provide practical examples, and show you how it’s recorded in your accounting, helping you manage these expenses more effectively.
What is Freight Out?
Freight out, also known as delivery expense, refers to the shipping costs a business incurs when transporting goods from its warehouse or facility to the customer. These expenses typically include transportation fees, packaging materials, handling charges, and any customs duties related to outbound shipments. It is a key component of logistics and supply chain operations.
Why Freight Out Matters
Freight out is recorded as a separate operating expense in a company’s financial statements and is not included in the inventory cost. Tracking it separately allows businesses to:
- Understand true product profitability by isolating delivery costs from production or purchase costs.
- Make informed pricing decisions to ensure shipping costs are correctly accounted for in product prices.
- Optimize logistics strategies by identifying inefficiencies and exploring cost-saving opportunities, such as better carrier contracts or more efficient packaging.
Impact on Business Strategy
Managing freight effectively is crucial for businesses that sell physical products, whether through e-commerce or traditional retail channels. Rising shipping costs or disruptions in the freight industry can directly impact a company’s bottom line and may require adjustments in pricing, shipping policies, or supply chain strategies.
Key Factors That Influence Freight-Out Costs
Freight-out costs can vary significantly and are influenced by several factors. Understanding these drivers is essential for effective cost management and accurate pricing strategies. Here are the core factors that impact outbound shipping expenses:
- Market Conditions: Market forces also drive shipping costs. When demand for transport services is high—such as during peak seasons or periods of limited carrier availability—freight rates typically increase. Economic conditions, driver shortages, and supply chain disruptions can all contribute to increased prices.
- Distance and Destination: Generally, the farther your goods need to travel, the more expensive the shipment. Deliveries to remote or international locations increase costs due to higher fuel consumption, labor, and potential customs or regulatory requirements.
- Type of Goods: Both the weight and size of your shipment affect pricing. Heavier items cost more to move, while lighter packages may still incur higher charges if they occupy a large amount of space, known as “dimensional weight” pricing. Additionally, goods that require special handling (e.g., fragile, hazardous, or temperature-sensitive items) add to the overall cost.
- Mode of Transportation: Your shipping method plays a significant role in determining the cost. Air freight is fast but expensive, while ocean freight is more cost-effective for large volumes, though significantly slower. Ground shipping falls somewhere in between, depending on the distance and urgency.
- Fuel Prices and Surcharges: Fuel is a volatile cost component. Carriers often pass fuel price changes on to shippers through variable fuel surcharges, which can significantly impact total freight costs.
Mistakes to Avoid in Managing Freight Out Costs
Effectively managing freight-out expenses is crucial for maintaining profitability, but many businesses make avoidable mistakes that increase costs. Here are some of the most common pitfalls to watch out for:
- Lack of Visibility and Data: Many companies fail to analyze their freight-out costs thoroughly. Simply reviewing the total bill without breaking down expenses by carrier, route, product, or customer can obscure opportunities for cost savings and process improvements.
- Ignoring Accessorial Charges: Focusing solely on base freight rates while overlooking accessorial fees—such as liftgate service, residential delivery, re-delivery, or detention—can result in significant unexpected charges. These add-ons can substantially inflate your final shipping costs.
- Inefficient Packaging and Loading: Using oversized boxes, poorly configured pallets, or failing to consolidate shipments can result in higher dimensional weight charges and inefficient trailer space utilization. Optimized packaging helps reduce costs and improve shipping efficiency.
- Relying on a Single Carrier or Failing to Build Relationships: Sticking with one carrier out of convenience or frequently switching without establishing strong relationships can limit your leverage. Building long-term partnerships often leads to better service, customized solutions, and more competitive rates.
- Failing to Negotiate Rates: Accepting published or default rates without negotiation is a missed opportunity. Freight rates are often negotiable, especially for businesses with consistent or high shipping volumes. Regularly revisiting contracts helps ensure you’re getting the best value.
- Misunderstanding Incoterms: Failing to apply or overlooking Incoterms in international shipping agreements can result in unexpected duties, taxes, and customs clearance responsibilities. A clear understanding of these terms is critical to avoid cost surprises and risk mismanagement.
- Poor Communication and Documentation: Incomplete or incorrect shipping documentation can lead to delays, re-delivery fees, and customs issues. Similarly, a lack of clear communication with carriers or customers increases the chance of shipping errors and additional charges.
How to Optimize Freight Out Management
There are many general and specific ways to avoid these mistakes and better manage your freight-out costs.
Let’s consider a few:
1. Strategize Routes and Schedules
Plan delivery routes with precision, factoring in traffic patterns, delivery windows, and fuel efficiency. Optimize schedules to minimize loading/unloading delays and keep shipments moving efficiently.
2. Optimize Load Capacity and Consolidation
Maximize vehicle utilization by fully loading trucks and consolidating smaller shipments into larger ones when possible. This lowers per-unit shipping costs and reduces the number of trips. Use space-efficient packaging to cut down on dimensional weight charges.
3. Smart Carrier Selection and Rate Negotiation
Avoid relying on a single carrier. Build a diverse carrier network to compare pricing and service levels. Leverage your shipping volume to negotiate better rates and prioritize long-term relationships for increased flexibility and service reliability.
4. Leverage Transportation Technology
Implement a Transportation Management System (TMS) to automate rate comparisons, optimize routing, and streamline tracking. Use real-time visibility tools to monitor shipments and analyze data for performance improvements and cost control.
5. Track Costs and Perform Regular Audits
Treat freight out as a separate selling expense for more transparent financial reporting. Routinely audit carrier invoices for accuracy and overcharges. Use historical data to forecast shipping volumes and improve budgeting and decision-making.
6. Match Shipping Method to Need
Avoid defaulting to the fastest shipping option. Instead, select the shipping method based on factors such as delivery urgency, product value, and customer expectations. When speed isn’t essential, consider offering incentives to encourage customers to choose slower, more cost-effective delivery options.
7. Plan and Manage Risk Proactively
Anticipate peak periods like holidays and secure capacity early to avoid surge pricing. Develop contingency plans with backup carriers and alternative routes to reduce disruptions from weather events, labor strikes, or port delays.
8. Improve Packaging Efficiency
Use durable but lightweight packaging that protects products without increasing dimensional weight. Minimize excess space and void fill to keep shipping costs low while maintaining delivery integrity.
9. Master International Shipping Logistics
Understand and correctly apply Incoterms to define shipping costs and responsibilities in international transactions clearly. Ensure documentation is accurate and compliant with customs regulations to avoid delays, penalties, or additional charges.
