- SAP Managed Tags
1. Credit Management
In SAP, credit management is a function within Financial Supply Chain Management (FSCM) that oversees and regulates customer credit limits to promote timely payments and minimize the risk of bad debt. Mainly these 3 scope items are responsible for Overall credit management function:
Advanced Credit Management (1QM)
Credit Agency Integration (1RY)
2. Automatic Credit Limit Calculation
Automatic Credit Limit Calculation is a feature of advanced credit management that streamlines the process of setting credit limits through automation. We will explore how the system is set up and operates to automatically determine credit limits.
Please note: This blog is intended for individuals who already have a fundamental understanding of basic credit management. Automatic Credit Limit Calculation is part of 1QM scope item.
Additionally, there is a separate blog for Automatic Credit Score Calculation available:
Automatic Credit Score Calculation in S/4HANA Cloud Public Edition
3. Scenario
We are going to calculate credit limit based on three condition such as
- Last three months sales of the company code with the customer
- Collateral
- Risk Adjustment (Calculated Credit Limit adjustment based on Risk Class of the customer)
4. Related Configuration
Some configurations are managed through the configuration node (CBC or Manage Your Solution), while others are defined directly via various SAP Fiori Apps.
Process Step | App Name/ Config | Remarks |
Credit Formula for Score and CL | Define Formulas [CBC] | Just the structure, values are filled with Fiori App |
Rule for Scoring and Credit Limit, Rating procedure assignment | Create Rule for Scoring and Credit Limit Calculation [CBC] |
|
Formula Parameters are created | Maintain Formula Parameters (App) | Formula Parameters are created and assigned to score formula group and limit formula |
Formula is created | Manage Formula in Credit Management (App) | Formula is created (code is used previous one). |
Valuation is assigned against the rules | Manage Credit Management Rules (app) |
|
Credit Details are updated in Customer Master | Manage Credit Account |
|
- Define Formulas (CBC)
Here, we are only setting up the code and framework for the Credit Limit Formula. The logic will be incorporated later in the Manage Formula in Credit Management App. This same formula is assigned during the configuration process in the "Create Rule for Scoring and Credit Limit Calculation" section.
- Create Rule for Scoring and Credit Limit Calculation (CBC)
Here, we create a rule which is used for credit score and Credit Limit calculation. The formula is assigned to a rule within both the Score folder and the Credit Limit folder. We will focus Credit Limit folder on this blog.
Credit Limit Folder:
Here, we assign Segment and credit limit formula that we had created under ‘Define Formulas’
Note: The Score Folder and Rating Procedure selection are primarily needed for credit score calculation. We will cover these in another blog titled Automatic Credit Score Calculation in S/4HANA Cloud Public Edition
Note: This Credit Score Rule is assigned with Business Partner (Customer) in Manage Credit Account App. Please refrain from using the Maintain Business Partner App for credit management purposes. It is recommended to use the Manage Credit Account App instead. Using the Maintain Business Partner App may not yield the desired outcomes in some processes within Credit Management.
- Manage Formula in Credit Management (App)
You can create Credit Limit Formula from Template or from scratch (create). We will create from scratch.
It is assigned to the formula you previously created in the configuration step "Define Formula."
Threshold and Rounding will be detailed in the sections below. Please pay close attention.
Credit Limit Formula Tab:
Change mode.
Multiple methods can be defined for calculating your credit limit formula. In our approach, we have considered the following factors:
The credit formula is divided into two sections: 1. Limit Demand and 2. Limit Adjustment.
Limit Demand:
We calculate the credit limit based on the total sales value from the last three months, plus the collateral value. For example, if your sales were Rs. 700 and collateral was valued at Rs. 300, then your credit limit would be calculated as Rs. 1000.
Limit Adjustment:
- If the Risk class is A (No Default Risk), the credit limit will be twice the Limit Demand (Rs. 1000 * 2 = Rs. 2000).
- If Risk Class is B (Low Default Risk), the credit limit will be 1.5 times the Limit Demand (Rs. 1000 * 1.5 = Rs. 1500).
- If Risk Class is D (High Default Risk), the credit limit will be 0.5 times the Limit Demand (Rs. 1000 * 0.5 = Rs. 500).
The credit score formula calculates the credit score, which automatically fetches the risk class based on the configuration (Create Risk Classes). This illustrates the integration between credit score calculation and credit limit adjustment, where the risk class plays a critical role in determining the adjusted credit limit.
Under Limit Demand: Operand 1 and Operand 2 are Formula Parameter and Result Parameter is a Text. The Result Parameter is a descriptive text you need to provide when defining it, and it can be anything that makes sense for the process. In our case, we have named it ‘Credit Limit Calculation’.
Under Limit Adjustment: Operand 1 is a Formula Parameter and Operand 2 is the Result Parameter from Limit Demand.
We have incorporated the following Formula Parameters in our Credit Limit Formula, which we will explore in detail in the subsequent step:
- ZSALE_H_3M (Sales from the Last 03 Months)
- COLLATERALS (Collaterals)
- RISK_ADJUSTMENT (Risk Adjustment)
Note: It is necessary to establish Formula Parameters prior to creating the Credit Limit Formula in the Manage Formula in Credit Management (App).
Credit Limit Simulation:
We can simulate the credit limit calculation for a specific business partner and segment to verify the functionality of our formula. You can expect the same results when performing calculations for the same customer in the Manage Credit Account App.
You can learn about Limit Adjustment, Rounding, and Threshold in the Manage Credit Management Rules Section.
- Maintain Formula Parameters App
Numerous formula parameters are already available; ideally, you should use the standard ones, but it is also possible to create your own formula parameters.
Formula parameters can be categorized into two types:
- Formula Parameter for Score Calculation: Assigned to the Parameter Group for Score Formula (used in credit score formulas).
- Formula Parameter for Credit Limit Calculation: Assigned to the Parameter Group for Limit Formula (used in credit limit formulas).
In this blog, we will focus solely on the 'Parameter Category for Limit Formula'.
Let's explore the specifics of these three Formula Parameters
- ZSALE_H_3M (Last 03 Months Sales)
- COLLATERALS (Collaterals)
- RISK_ADJUSTMENT (Risk Adjustment)
If you create a custom Formula Parameter, it needs to be assigned to the appropriate folder. For example, we created a Formula Parameter called ZSALE_H_3M for credit limit calculation, which we then assigned to the Parameter Category for Limit Formula.
ZSALE_H_3M (Last 03 Months Sales)
COLLATERALS (Collaterals)
RISK_ADJUSTMENT (Risk Adjustment)
- Manage Credit Management Rules
Here, valuation is mapped to specific rules.
We will explore the rules that are pertinent to the Credit Limit Formula:
- Formula: Credit Limit Rounding Rule
- Formula: Credit Limit Threshold
- Formula: Risk Adjustment
Formula: Credit Limit Rounding Rule
You can define it by Risk Class. In this instance, I have left the Risk Class field blank, meaning it applies to all Risk Classes in the system. With an amount of 100 and a rounding position of 2, along with a Rounding Rule of Up (Round Up), this configuration means if the system calculates a credit limit amount as Rs. 7056, it will round up to Rs. 7100.
Formula: Credit Limit Threshold
Continued screen shot
Here, we set the minimum and maximum values for credit limit calculations. If the minimum value is set at Rs. 6000, then the system will assign a credit limit of Rs. 6000, even if the calculated limit falls below Rs. 5999. Likewise, the system will not exceed the maximum value assigned here.
Note: You can establish multiple conditions and designate various lower and upper credit limit values based on factors such as Segment, Country, Risk Class, and Credit Group.
Formula: Risk Adjustment
Adjust the credit limit of a business partner depending on the risk class and credit segment.
Input a Risk Class to adjust the credit limits for. If you want the adjustment to apply to all credit segments, leave the Credit Segment field blank. The credit limit for the relevant business partners will be multiplied by the value entered in the Risk Adjustment field. Entering a factor of 1 in the Risk Adjustment field will leave the credit limit unchanged.
Entering a factor greater than 1 will increase the credit limit.
Entering a factor less than 1 will decrease the credit limit.
This is utilized in the 'Manage Formula in Credit Management App'. Please refer to that section for a detailed explanation.
5. Master Data and Calculation Process
Master data such as:
- Calculation Rule
Credit scores are computed at the business partner level, while credit limits are calculated at the segment level.
Note: The Calculation Rule (ZCRLIMIT) serves as the connection among all the configurations and settings implemented for calculating the credit limit.
- Segment Tab (go to details): Credit Limit Calculation
Validity is derived from the configuration settings in Create Rule for Scoring and Credit Limit Calculation (CBC).
In the top right corner, you'll find a button marked in yellow "Calculate Credit Limit." This button appears in the segment section when in edit mode. Once you calculate the credit limit for the customer and segment combination, the remaining process will proceed as usual.
- Collateral
Items like Collateral, Insurance, etc., can be maintained either at the Business Partner Level or the Segment Level, depending on the business scenario. It is feasible to maintain these values at both levels simultaneously.
Note that I have only discussed the items we utilized from the perspective of our blog; there are many other aspects of master data relevant to credit management that are not covered here. This blog is intended for those who have a solid understanding of basic credit management.Top of Form
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