The Rise of Surcharges and How AP Departments Can Manage Them

Invoices are now more likely to have additional charges ranging from freight surcharges to “COVID” charges to environmental fees. In this post, we will discuss the rise of surcharges and how you can manage them.

Robert Lynch, P2P Insights Analyst
Published on September 26, 2022

Invoices are now more likely to have additional charges ranging from freight surcharges to “COVID” charges to environmental fees. The increasing number, types, and values of surcharges imposed is a nightmare for accounts payable teams – especially for companies that process and reconcile invoices manually.

Accounts payable departments are tasked with ensuring that invoices are accurate and reflect appropriate pricing after these charges have been applied. This can be a major challenge for AP teams, preventing them from fulfilling their core function of paying invoices on time. In this post, we will discuss the rise of surcharges and how you can manage them.

 

AP Challenges in Processing Charges

Companies have no control over the rising cost of transporting goods, but the lack of visibility affects the company’s ability to strategize, forecast, and optimize costs. Aside from regular shipping fees, carriers are imposing extra charges like:

  • Peak season surcharge
  • Demurrage and detention fees
  • Emergency bunker surcharges
  • Trailer repositioning charges
  • Fuel surcharges
  • Surcharges on freight shipped to crowded markets or remote areas
  • Overnight fees
  • Environmental charges

AP teams struggle with surcharges for the following reasons:

 

1. Additional Price Exceptions

Significant price inflation for freight and transportation is causing high levels of price exceptions, triggered by differences in pricing on the purchase order and the invoice.

Procurement departments struggle to keep up with constantly changing unit costs. As a result, purchase orders may not reflect upcoming surcharges. After the surcharges are added, the final amount due on the invoice ends up being higher than expected. A significant discrepancy between the invoice received, and the supporting purchase order may require additional verification.

Even if companies anticipate higher freight charges, correctly linking the surcharge to the appropriate items on the PO often requires manual intervention. This adds to a growing workload.

 

2. Reduced Visibility of Product Costs

While invoices generally include the same elements – like the name of the buyer and the seller, date, description of goods and services purchased, price, and amount due – there is little consistency in how surcharges are added. Some vendors may include freight or additional fees in the product invoice, while sometimes third party freight companies invoice separately. Unanticipated surcharges require significant amounts of manual data entry, leading to errors and variances in classification. Investigating surcharges to properly associate them with the goods purchased can be labor intensive.

Ultimately, additional charges make it harder for Finance & Procurement to calculate the true cost of goods purchased.

 

3. Inconsistent Vendor Practices and Payment Issues

Due to higher shipping charges, which are often combined with delays in delivery, more vendors are likely to:

  1. Issue invoices for partial deliveries which leads to greater strain on processing invoices efficiently since there are multiple invoices for one transaction.
  2. Ask for prepayments while goods are still in transit, creating more payments to track and potentially causing confusion and delays. AP needs to make sure no duplicate payments are made.
  3. Require customers to pay freight to 3rd party freight companies, invoiced separately. In some cases, customers may have to pay invoices for more than one carrier due to a split shipment. This creates additional work to make sure that freight charges are properly matched to the original invoice for the goods purchased.

Since a greater volume of invoices now includes freight costs and other charges, AP teams spend more time and energy processing invoices. Employees could spend hours sending inquiries to vendors and shippers, waiting for a response to complete invoice processing.

The extra time necessary to verify fees may lead to missed early payment discounts. From a vendor perspective, delayed payments also negatively impact cash flows.

 

4. Extra Due Diligence

Surprise freight surcharges create extra due diligence work for the company since employees have to investigate the price variance.

20% of invoices are incorrect

Variances in the expected freight bill may be due to many reasons, including a mistake in the freight charges on the invoice. According to a 2021 survey, 20% of freight invoices are incorrect, making it even more important to look into discrepancies between expected and actual prices. However, the variance can also be due to any of these factors:

  • Using outdated base rates for accruals
  • Confusion on applicable taxes and tariffs, especially for international shipments
  • Inconsistencies in applying negotiated discounts with a carrier
  • Inaccurate estimates based on mileage, shipping weight, insurance, and delivery guarantees
  • Rising fuel and transport costs
  • Environmental charges that shipping companies need to pass on to customers

Determining the validity of charges increases invoice processing time and delays payments. Moreover, these fees may require additional approvals due to their unusual nature. Not only will the process involve more people and time, but it can also negatively impact vendor relations as invoices take longer to approve.

 

5. Vendor Onboarding

Due to supply issues, procurement teams often have to source goods and services from new vendors. Collecting information and storing it for audit and compliance purposes manually involves complex forms and lengthy processes.

Adding vendor onboarding and data maintenance adds more work to an already busy AP department. Manual verification of vendor information is expensive and prone to error.

 

Preparing Your AP Team to Handle Unusual Price Fluctuations

Having an effective strategy to deal with rising surcharges should be a priority for your AP team. Consider these steps to improve processes within your AP team:

  • Work with your procurement team to make sure they are capturing surcharges on the original POs
  • Maximize opportunities for auto-matching
  • Ensure your price tolerances are set at a level appropriate for the variance you are willing to accept
  • Match prepayments with the appropriate invoices
  • Setting up standard processes for handling exceptions
  • Create a mechanism to identify, account for, and categorize costs appropriately
  • Invest in automation

 

Combat Unexpected Charges with Smart Automation

As supply chains faced bottlenecks triggered by the pandemic, the spillover effect resulted in delays and price increases. Those third-party logistics services, along with hourly operating labor and direct materials, significantly impact profit margins and cash flow.

Addressing hidden freight costs is a challenge as companies scale up and grow. Even today, about 37% of businesses continue to use tools like Excel to optimize materials management.

Without an effective method for invoice processing, hidden freight costs could stay under the radar and continue eating into your profit. Companies that continue to rely on siloed, disparate, and excessive legacy systems struggle with poor data quality and lack of visibility.

AP automation is the key to transforming supply chains from a source of financial risk to a competitive advantage. With AP automation you can:

  • Capture invoices efficiently
  • Speed up invoice processing with an advanced matching engine
  • Automate data capture to identify these additional charges
  • Increase invoice processing volume
  • Automatically match and validate anticipated surcharges like freight
  • Match invoices accurately to capture and allocate costs to the appropriate goods
  • Customize rules that can be applied across all expense types, not just logistics

 

SoftCo’s P2P solution makes decisions based on pre-set rules to process invoices and learns from previous transactions. Automation reduces judgment calls and leads to greater standardization. Manual approval is only necessary when transactions do not fall within an expected range. Allowing the AP team to only deal with these exceptions means less time spent on manual tasks.

Leveraging technology allows you to manage surcharges effectively without overworking your AP team. Intelligent automation processes, reviews, and matches freight charges and other invoice information – allowing your accounts payable department to focus on high-value work while minimizing lost revenue.

 

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