According to AAA, diesel hit a record $6.53 a gallon on September 22, nearly 77% higher than a year earlier. Prices remained above $6.30 in early October. For food distributors, whose median net margin was 1.8% in 2025 according to the International Foodservice Distributors Association, that is not a fuel problem. It is an earnings problem.
The operational fixes, such as surcharges, routing and idle reduction, are well covered. What gets less attention is how this spike affects financial statements—and most distributors will see it at the same time as their lender and auditor.
With year-end less than three months away, below are four areas that need attention now.
1. Treat Surcharges as Revenue and Watch the Terms
Many distributors added or raised fuel surcharges this year, often by notice rather than contract amendment. A surcharge billed to customers generally belongs in revenue, not netted against freight expense. A simple index-based charge set at each delivery is straightforward. However, credits when diesel falls, retroactive true-ups, caps and volume rebates are not. These mean revenue has to be estimated, and auditors will test that estimate.
When customers short-pay or dispute surcharges, decide whether you are granting a price concession, which reduces revenue, or facing a bad debt. Document the answer before the auditors ask.
2. Plan for the Inventory Lag on Inbound Freight
Outbound fuel hits the income statement immediately. Inbound freight does not because it is part of inventory cost, so higher carrier charges sit on the balance sheet until product sells. Margins can look stable for a quarter, then compress as that inventory turns. The exception is abnormal freight, such as rush or expedited loads, which is expensed as incurred rather than added to inventory.
Update freight in standard costs and allocate variances between goods on hand and goods sold. Test slow-moving and short-dated product for write-downs using the right test for your method: net realizable value for FIFO and average cost, lower of cost or market for LIFO. LIFO users should also review the reserve and any layer liquidation.
3. Get Ahead of the Covenant Test
This is the exposure most likely to turn a bad quarter into a serious problem. Fuel compresses EBITDA, and covenants are typically tested on trailing results, so a distributor comfortably compliant in June may not be on December 31. Model the year-end calculation now using current fuel assumptions and the credit agreement’s actual definitions, add-backs and cure rights. If a breach looks possible, call the lender before the test date.
Timing matters here. A year-end violation can force long-term debt onto the balance sheet as current unless a qualifying waiver is obtained before the financial statements are issued. A likely breach also triggers a going concern evaluation—language no owner wants in front of a bank, buyer or key supplier. A waiver in hand before the audit is far easier than either conversation after it.
4. Lock in Fuel, but Decide the Accounting First
Some food distributors are fixing prices on part of next year’s diesel, and the accounting is decided at signing, not at year-end. A physical fixed-price contract is not automatically exempt from derivative accounting just because you expect to use the fuel; it must meet specific requirements and the company must document why.
A financial swap is marked to market through earnings unless it qualifies for hedge accounting, which requires formal designation at inception and cannot be added later. If diesel falls, an undesignated hedge books losses while the fuel itself gets cheaper. New Financial Accounting Standards Board (FASB) guidance makes it easier for hedges of forecasted fuel purchases to qualify. It takes effect for calendar-year public companies in 2027 and private companies in 2028, and can be adopted early. Bring your auditors into the term sheet review, not the year-end close.
What to Do Before December 31:
- Inventory every surcharge change made this year and confirm its revenue treatment.
- Decide how disputed and short-paid surcharges will be treated, and document why.
- Update freight in standard costs, allocate variances and test inventory under the correct write-down method.
- Run year-end covenant calculations on current fuel assumptions.
- Open the lender conversation now if the cushion is thin.
- Review any fuel contract or hedge with your auditors before signing.
None of this requires predicting where diesel goes next. It requires deciding now, while there is still time to act.
Grassi’s Food & Beverage team works with distributors on surcharge terms, inventory costing, covenant forecasting and fuel contracts. Contact us to talk through your year-end exposure.
