Steel margins are notoriously thin—and every dollar matters. For many distributors, the hidden culprits eroding profitability are not commodity prices or customer discounts, but rather small, consistent leaks in how processing charges and freight pass-throughs are recorded, applied, and recovered.
Audit managers increasingly focus their lens here—not because these are obvious fraud risks, but because they are recurring operational weaknesses. Left unchecked, they quietly siphon gross margin, misstate inventory value, and complicate financial close.
Where the Leakage Happens: Common Pain Points
In a high-volume, complex steel operation, the path from raw coil to delivered product often includes multiple value-add processes—slitting, cut-to-length, coating, beveling, etc.—and multiple shipping scenarios, from LTL to rail to customer-arranged freight.
Here’s where audit teams routinely find slippage:
Unbilled or underbilled processing charges: Material is slit or fabricated per customer spec, but the added cost is absorbed internally rather than charged or properly marked up.
Mismatch between quoted vs. actual processing cost: Sales teams quote based on average costs, but job-specific labor, rework, or tooling spikes inflate real costs, narrowing actual margin.
Pass-through freight omitted or miscalculated: Freight charges intended to be billed to the customer are missed, estimated incorrectly, or not linked to the sales invoice.
Processing charge duplication or omission in ERP: A coil may be processed at a third-party facility, but if the invoice isn’t captured or the routing is missed, it never flows into inventory cost or margin reporting.
Manual workarounds for complex freight terms: When freight terms deviate from standard FOB rules, clerks often apply “best-guess” allocations—introducing inconsistency and risk.
For finance leaders and auditors, these aren’t isolated issues—they are systemic and often tied to process gaps rather than deliberate oversight.
How Audit Managers Detect Margin Leakage
Audit professionals don’t just look at the GL—they follow transactions from quote to cash. Here’s how they detect leakage:
Sample Job Audits
Auditors select a set of customer orders involving value-added processing or special freight arrangements. They trace the original quote, sales order, and invoice—checking if the processing or freight markup was applied.
Example: A coil slit into 6 pieces for a customer carries a quoted surcharge of $22/ton. If the invoice only includes base steel price, that’s pure margin left on the table.
Vendor Invoice Matching
They review incoming invoices from processors (e.g., galvanizers, burners) and confirm those charges were either absorbed into COGS or passed through to customers.
Discrepancies arise when the purchase side (AP) books the cost, but sales side fails to reflect it, leading to margin compression without explanation.
Freight Variance Testing
Auditors pull freight invoices and compare against both PO receipts and outbound shipping records. Any material variance from quoted freight rates or customer pass-through rates is flagged.
If a customer requested “freight collect” but the distributor paid it and didn’t rebill, that’s margin lost.
Inventory Cost Layer Analysis
In steel ERP systems, cost is layered into inventory based on receipt and processing events. Auditors test whether each coil’s journey includes proper cost accumulation—raw steel + processing + freight.
Missed processing invoices or incorrect SKU reclassifications (e.g., after slitting or re-coiling) result in understated inventory and distorted margin.
Manual Adjustment Logs
High volume of manual adjustments—especially in freight clearing or processing accrual accounts—signals poor upstream control. Auditors review logs to assess whether adjustments are consistent, documented, and traceable.
High-Risk Scenarios That Invite Margin Erosion
Some operational scenarios are more prone to margin slippage than others:
Third-party processing with delayed invoicing: When service centers outsource work, delayed processor invoices often miss the month-end close, distorting COGS timing and creating a misleading gross profit view.
Freight absorption in bundled quotes: Sales reps might offer “delivered” pricing without clearly allocating freight costs, especially in competitive bids. Without system prompts, this freight gets buried in margins.
Customer-specific specs not updated in ERP: If processing requirements are defined verbally or outside the system, charges may never be applied or reconciled later.
Rework and quality reprocessing: Defective or mis-cut steel that is reworked is often excluded from cost allocations—especially when rework labor is internal and lacks job order linkage.
What Audit Managers Recommend to Prevent Leakage
Link Processing Charges Directly to Sales Orders
Ensure all value-added operations—internal or third-party—are quoted and recorded as separate line items in the sales order. This ensures charges appear on final invoices and flow into margin reports.
Automate Freight Reconciliation
Implement tools that pull freight invoice data directly into ERP, assigning costs based on shipment weight or destination. Create a control report comparing billed vs. recovered freight weekly.
Use Accrual-Based Cost Layering
For steel under process, accrue expected processing and freight costs based on historical rates or contracts—even before invoices arrive. Adjust accruals monthly to reflect actuals.
Mandate Two-Way Verification for Processing Charges
Require dual confirmation—operations must sign off on processing services received, and finance must match to vendor invoices. No entry should be booked without both.
Train Sales on Cost Recovery Discipline
Equip sales reps with a tool that calculates margin inclusive of all surcharges, not just steel price. Make margin performance tied to recovery of processing and freight—not just volume sold.
The Real Cost of Leakage
In a tight-margin business like steel distribution, consistent 1–2% margin leakage from missed processing and freight pass-throughs can eliminate profitability. Worse, it can mask true product-line performance, mislead pricing decisions, and complicate financial forecasting.
Audit managers who drill into these details aren’t just nitpicking—they’re surfacing financial blind spots that, if addressed, can restore tens or hundreds of basis points of margin. The best time to plug these holes isn’t during audit season—it’s now, while process adjustments are still controllable and data is fresh.
