Introduction
Credit management is the management of credit facility granted to customers as credit exposure allowed. Credit facility is just like telling our customers that they need not pay immediately, they can pay at a future point of time after receiving the goods or services. But, this payment at a future point of time involves risk. So, according to the risk foreseen, the amount and time of credit (Credit Exposure) granted changes. For some customers, the risk perceived may be high such that we may demand payment in advance.
This credit management comes partially under preview of Sales and Distribution (SD) and partially of Account Receivables (AR).
Key challenge: Reducing credit risk without hampering the supply chain.
Dealing with Bad Debt: Before getting involved, ask yourself:
Credit Management in SAP
Assuming that we already have SD and AR implemented, credit management can be broadly used to:
Automatically alert the credit representative of a customer’s critical credit situation as soon as order processing starts and he may be able to check a customer’s credit situation quickly and reliably, and, in line with the appropriate credit policy, to decide whether the customer should be granted credit.
Credit Check
Every customer is having a certain credit limit, which is measured and maintained by Finance people. Credit check is done for each and every order/SD documents generated.
Credit check is performed at the following stages of Sales order cycle, Credit check settings present in each SD document is responsible for interacting with FI module.
Figure 1:Stages of Credit Check
Configuration Setting
Define Risk Category
SPRO > Financial Accounting > Account Receivable and Accounts Payable > Credit Management > Credit Control Account > Define Risk Categories
Figure 2:Define Risk Category
Define Credit Control Area
SPRO > Enterprise Structure > Definition > Financial Accounting > Define Credit Control Area
Figure 3:Define Credit Control Area
Figure 4:Define Credit Control Area - Details
The type of update chosen controls when the values of open sales orders, deliveries and billing documents are updated depending upon the type of document being generated. One of the following update groups can be chosen as available in standard SAP
Note: SAP recommends the use of update group 000012
Organizational Unit in Credit Management
The organizational unit used in credit management is Credit Control Area. It represents the area where customer credit limits are specified and monitored.
Depending on the relationship between credit control area and company code, the credit management can be categorized as:
Every company code has its own credit control area. Hence, we can define credit limits for a customer separately for each company code. This method delivers benefits such as the local payment cultures can be respected, each company code has the independence to make its own decisions.
Multiple company codes are clubbed under the same credit control area. So, if the customer transacts with company codes which are under the same credit control area, the limit is set for all the company codes combined together.
If the currencies of these company codes are different from that of the credit control area, the receivables are converted to the credit control area currency to check with the credit limit set. Centralized credit management has benefits such as easier analysis of credit policy and modifications required, the focus is shifted to other important areas such as bad debt reductions and improved customer relations as there is only a central credit team that needs to be consulted irrespective of the geography etc.
Figure 5: Organisational Unit in Credit Management
Assigning Company Codes to a Credit Control Area
SPRO > Enterprise Structure > Assignment > Financial Accounting > Assign Company Code to Credit Control Area
Figure 6: Company Codes to Credit Control Area
Assigning Sales Area to a Credit Control Area
SPRO > Enterprise Structure > Assignment > Sales and Distribution > Assign Sales Area to Credit Control Area
Figure 7: Sales Area to Credit Control Area
Define Credit Groups
SPRO > Sales & Distribution > Basic Functions > Credit Management and Risk Management > Credit Management > Define Credit Groups.
The credit group specifies which subsequent transaction can be blocked for processing, if the credit limits are exceeded.You can use the default credit groups or create new once.
Figure 8: Define Credit Groups
Assigning Sales Documents and Delivery Documents to Credit Group
SPRO > Sales and Distribution > Basic Functions > Credit Management/Risk Management > Credit Management > Assign Sales Documents and Delivery Documents > Credit Limit Check for Order Types > Credit Limit Check for Delivery Types
Figure 9: Credit Limit Check for Order Type
Figure 10: Credit Limit check for Delivery Type
Simple Credit Check Vs Automatic Credit Check
Figure 11: Simple Credit Check Vs Automatic Credit Check
Simple Credit Check
The simple credit check compares the payer customer master record’s credit limit to the net document value plus the value of all open items.
In case the value of the document and open items is more than the credit limit:
Automatic Credit Check Variations & Recommended Use
Automatic Credit Check - Gives extra parameters to define credit checks like Credit Control Area, Risk Category and…
Figure 12: Automatic Credit Check Maintenance
STATIC CREDIT LIMIT DETERMINATION:
Recommended Use: This is seen to be safer to use as compared to Dynamic Credit Check as it covers all documents due to varying business needs. For high volume and very low risk customers (e.g. Risk Category 001), it is good practice to put deliveries on block and leave the orders untouched. This prevents a level of check.
DYNAMIC CREDIT CHECK:
1) 2) 3) 4) Above Mentioned
5) Horizon Period : Eg. 3 Months.
Here the System will not consider the Open items 1, 2, 3 & 4 values for beyond 3 months.
Recommended Use: If the business is always likely to have fast moving items leaving no chances of Open Orders, Open Deliveries etc for long time period, this is good to use. There can be other business considerations to include only Open items within certain period
Maximum Document Value
The sales order or delivery value may not exceed a specific value which is defined in the credit check. The value is stored in the currency of the credit control area. This check is useful if the credit limit has not yet been defined for a new customer. It is initiated by a risk category which is defined specifically for new customers.
Recommended Use: Use it for Credit Group 01 (Orders) and high risk category customers which you always want to review beyond a particular value. It may also be used for prepaid or one-time customer with Max doc value.
Critical Fields:
This Credit check is initiated by document changes done in credit sensitive fields. One such example is terms of payment. When this field changes, a check is done on the data in sales order against the data in the customer master.
Date of Next Review
System uses the date of the next credit review as a trigger for an automatic credit check. If you process a sales order after a customer's next review date has already gone by, the system automatically carries out a credit check.
Overdue Open Items
The relation between open items which are more than a certain number of days overdue and the customer balance may not exceed a certain percentage. These values are defined in the customizing for automatic credit control.
Recommended Use: Use it for Credit Group 01 (Orders) in conjunction with Static Credit Check for slightly higher risk category customers, where you don’t want to have more than a certain % of open items. The values may be reduced with increase in risk category values.
Oldest Open Item
The oldest open item may not be more than a specified number of days overdue.
Recommended Use: Use it for any Credit Group 01 or 02 (Orders or deliveries) in conjunction with Static Credit Check for slightly Low-Medium risk category customers.
Maximum Number of Dunning Levels Allowed
The customer's dunning level may only reach a specified maximum value exceeding which the item may be blocked if so configured.
User-Defined Checks- For e.g. Cheque received from a customer bounced, then subsequent orders may get blocked.
Credit Management at work
For each customer, credit limits are specified in the particular credit master record. If the customer exists in multiple credit control areas, individual limit can be specified for each credit control area. In addition, a central credit limit can also be specified for all the credit control areas under which the customer exists. Then, the total of the credit limits for each credit control area should not exceed the central credit limit.
FD32 (FI T code) is used to set credit limit and credit risk category for the customer.
Figure 13: Credit Limit for Customer
Overview Screen
It gives an overview of credit settings of the customer.
Figure 14: Overview Screen
Central Data Screen
It gives an overview of central credit limit settings of the customer.
Figure 15: Central Data Screen
Status Screen
Shows the customer's actual individual details according to particular credit control area
Figure 16: Status Screen
Credit Check at work in Sales Order creation
When sales order is created (SD), system verifies the credit limit used by the customer by communicating with values set in FD32 (FI)
Figure 17: Credit Check
Release Sales Documents from Credit Block
Block will be released if the Agent discussed with Customer and / or payment is received from Customer. VKM1, VKM3 and VKM5 are key T codes used to release Sales and Delivery documents from Credit Block. For the document selected, the following options are available:
Figure 18: Release Credit Block
Reports
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