Smarter accruals: how to get your AP and operations teams on side
Why accruing is vital to operating a logistics business in uncertain times
In the logistics industry, operational costs typically make up an overwhelmingly large proportion of a company’s total spend. In a business where volumes are high and margins are tight, the success of a company depends on its ability to manage and control these costs effectively.
As CFOs know, the tricky part is getting insight into gross margin as early as possible. If you need to wait for all the invoices to arrive from your suppliers before you can calculate the total cost, your view of your company’s financial health will lag reality by one or two months. By the time you see a problem—for example, that one of your accounts has ceased to be profitable—you may already have been losing money for some time.
These problems can be overcome if your operations team champions business health with impeccable accrual discipline. If the correct accruals for each operation are entered as soon as the data is available, gross margin can be estimated much earlier and much more accurately. Every CFO knows that, ultimately, an accurate and timely understanding of your finances can be leveraged to enable growth.
However, entering accruals is often seen as an unwelcome administrative chore by operational teams. How can you persuade colleagues that this admin will benefit them too? That the time they spend up front on their accruals will remove admin headaches later down the line and enable operations to be key drivers in unlocking even more business growth.
- Streamline processes: Minimise email ping-pong and keep suppliers happy
- Accelerate insights: Unlock budget for future growth
- Increase controls: Get to #1 in the P&L leaderboard
- Enable automation: Remove mundane tasks altogether
Streamline processes: Minimise email ping-pong and keep suppliers happy
The reason early accruals are more efficient is that they help to streamline the whole accounts payable (AP) process. If the accruals for each job are in good order, then as soon as the invoice comes through from the supplier, the AP team can simply check it against the accruals, and if the totals match, post it straight away.
This avoids the need for a huge amount of back-and-forth between the AP team and the ops team, since the accountants already have all the information they need to do their job, and there’s no need to double-check with ops unless there’s a significant discrepancy. So instead of having to query almost every item, most invoices can go straight through the process, and ops only needs to be involved if there’s an exception.
Streamlining processes helps:
- Enable faster settlement of invoices
- Strengthen relationships with suppliers
- Reduce the risk of late payment fines and bad payment terms
- Unlock opportunities for redeployment of resources
- and can even facilitate compliance with regulations and best practices
For example, in France, freight forwarders are obliged to settle invoices from trucking companies within 30 days. The AP team at one Shipamax client used to spend much of its time dealing with urgent payments to make sure it could comply with this requirement. Today, thanks to its use of early accruals, there’s no longer a risk of late payment, and the team has much more time to focus on other issues.
Accelerate insights: Unlock budget for future growth
The earlier accruals are captured, the sooner gross margin can be calculated for each job, and for your company’s overall operations. According to our clients, this makes a night-and-day difference to visibility, because it means that senior management can monitor performance in more-or-less real time, instead of one or two months after the fact.
This is particularly important as companies grow. When you only have a handful of offices, the management team can be close enough to the ops team to stay in touch with how operations are going day-to-day, even if they don’t know the precise figures. But once your operations expand, that’s no longer possible—you have to start relying much more heavily on metrics such as gross margin to gauge performance.
In short, if you’re already a big company and haven’t got a good grip on your accruals, you could probably improve your performance significantly. And if you’re a small company that’s looking to grow, getting your accruals in order is going to be an important enabler for achieving your growth goals.
Increase controls: Get to #1 in the P&L leaderboard
Next, let’s consider financial controls. If you don’t log the expected costs for each operation as early as possible, then from a controlling perspective, it will appear that most of your jobs are extremely profitable. This is misleading and makes it impossible for the finance team to tell whether there’s an issue with a particular job, client, or supplier without taking a closer look at the job.
By contrast, if you ensure that the expected revenue and expected costs for every job are always logged in your systems as soon as possible, then controllers can tell at a glance whether a job is within the normal parameters. This means they can focus on the outliers—that is, any job whose P&L is either much higher or much lower than the norm—which saves huge amounts of time.
Moreover, since controllers no longer have to work through a huge backlog and check every operation individually, they are able to spot and review issues earlier. This makes any problems much simpler to resolve. For example, if the total on a supplier’s invoice is incorrect, it’s much easier to get a credit note if you query the invoice within a couple of weeks, than if you only raise the issue several months later.
This increased control will ensure that profitability of jobs is a central part of tracking and will help the Operations team to identify opportunities for expansion and growth.
In summary accruals improves your financial controls by helping you to:
- Identify issues with jobs at a glance
- Spot problems earlier
- Resolve queries faster
- Increase profitability of Operations department
Enable automation: Remove mundane tasks altogether
Finally, many logistics companies recognise that the traditional AP invoicing process is a major drain on the time and energy of both their ops and accounting teams. Reconciling thousands of invoices with hundreds of jobs each month is a painstaking and tedious process that distracts and diverts skilled staff from more interesting, higher-value work.
This type of process is a prime candidate for automation, but unless you follow good practice with your accruals, it’s impossible to automate safely. Automated invoice processing depends on the ability to check the amounts listed on incoming invoices and confirm that they match the expected costs—but if you don’t have your accruals in place, there’s nothing for the automation engine to match against.
At Shipamax, we often advise our clients that technology isn’t a silver bullet. Implementing automation requires more than just software, it involves organisational and cultural change too. The good news is that we’ve seen many clients successfully transform their ops and finance processes while adopting our technology at the same time—and the results are often beyond all their expectations. Rohlig Logistics, for example, saw an increase in straight-through processing immediately, and found that implementing our technology helped to identify bottlenecks in their processes that supported further operational improvements.
If you’d like to learn more about how improving your accruals processes can unlock significant business benefits and open up opportunities for AP invoicing automation, reach out to us today.