What it means
When you run a business, you often have to send your finished goods out to buyers. The money you pay to couriers, trucking companies, or postal services for this delivery is known as freight out, or delivery expense.
This is completely different from freight in, which is the cost you pay to get raw materials or goods delivered to your own warehouse. From an accounting perspective, freight out is recorded as a selling expense on your income statement.
It directly reduces your operating profit. Because these shipping costs eat into your profit margins, tracking them carefully is vital for pricing your products correctly.
If your delivery costs are high, you need to ensure your sales price covers both the item and its journey to the customer. Many companies offer free delivery to attract buyers, but the business still has to pay the courier.
In these cases, freight out becomes a major overhead cost that management must monitor closely. If shipping fees spike unexpectedly, it can quickly turn a profitable product line into a loss maker.
Understanding this expense helps non-finance managers negotiate better carrier rates or adjust minimum order values to protect profitability. Freight out is like paying for the taxi to take a guest to their destination, whereas freight in is like paying the delivery charge for groceries brought to your own kitchen.
In practice
Real-world examples
Example 1
An artisan candle maker sells a batch of goods to a boutique shop for $500. The maker pays $20 to a courier service to deliver the boxes. That $20 is recorded as freight out and appears as a selling expense, not as part of the cost of making the candles.
Example 2
A regional office furniture supplier offers free delivery for orders over $1,000. A local firm orders desks worth $1,200, and the supplier pays $50 to a local haulage firm to drop them off. The supplier absorbs the $50 and records it as freight out, so the true profit on the order is $50 lower than the invoice suggests.
Example 3
An online spare parts retailer ships an urgent replacement motor to a factory. The express courier fee is $40, which the retailer absorbs as a selling expense to keep the client happy. The retailer reviews these rush costs every quarter to decide whether to pass some of them on in future.
Think of it
Freight out is like paying for the taxi to take a guest to their destination, whereas freight in is like paying the delivery charge for groceries brought to your own kitchen.
Formula
Calculation
Total Freight Out = Sum of all delivery invoices paid for customer shipments over a given accounting period.
Example: if a company makes four shipments costing $30, $40, $25 and $35 respectively, the formula is 30 + 40 + 25 + 35 = $130 total freight out.
A second example measures freight out against sales, which is how managers usually track it. A business has monthly sales of $50,000 and pays $3,500 in freight out, so freight out is 3,500 / 50,000 = 7% of sales. After introducing a minimum order value for free delivery, freight out falls to $2,500, which is 2,500 / 50,000 = 5% of sales. That two-point improvement is worth $1,000 a month, or $12,000 a year. Because the percentage is easy to compare month by month, a sudden jump in it is an early warning that carrier rates or order patterns have changed.Case study
Seen in the real world
This is a fictional, illustrative scenario. Bright Box Packaging, a mid-sized firm selling eco-friendly boxes to regional bakeries, noticed that its net profit was shrinking despite rising sales. The finance manager reviewed the books and discovered that freight out costs had doubled over the past year. Because the company offered free shipping on all orders, every fuel price increase and courier rate hike directly harmed their bottom line.
The management team decided to change their policy. They introduced a minimum order value of one hundred pounds to qualify for free delivery, and charged a flat five-pound fee for smaller orders. They also negotiated a bulk contract with a single national courier. Within six months, freight out expenses dropped by thirty percent, and the company restored its healthy profit margins without losing customers.
Watch out
Common mistakes
- Grouping freight out with the cost of purchasing inventory, which distorts the gross profit margin.
- Failing to track shipping expenses separately from general office postage and stationery costs.
- Forgetting to factor delivery costs into the final retail price when offering free shipping promotions.
Questions
People also ask
Is freight out a direct cost or an operating expense?
It is classified as an operating or selling expense, not a direct cost of production, because it happens after the product is finished and sold.
Who pays for freight out if the customer covers shipping?
If the customer pays the shipping fee directly or reimburses you, it does not become your freight out expense. Freight out only applies when your business absorbs the delivery cost.
How does freight out affect my taxes?
Because freight out is a normal business operating expense, it is generally tax deductible, reducing your overall taxable business income.