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SAP Credit Management 1

SAP Credit Management


Basics of SAP Credit Management

Siva - Magna Training

ABSTRACT
This document explains the fundamentals of Credit Management and
how SAP implements Credit Management.

http://www.magnatraining.com SAP 1
Credit Management
Table of Contents
Table of Contents.....................................................................................2
What is Credit Management ? .................................................................3

Types of Credit Management ...................................................................4


Simple Credit Check.........................................................................................4
Dynamic Credit Check......................................................................................5
Organizational Structures & Master Data..................................................6

Customization..........................................................................................7
Example ................................................................................................10
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What is Credit Management ?


Most enterprises extend credit to their customers. This literally means, selling their
goods and collecting money at a later point of time. The amount of credit extended is
determined by the customer’s credit worthiness (Also called credit limit ) . The
number of days for which credit is extended is based on the payment terms
associated with that transaction.

For ex., Customer A could be given a credit limit of $ 100,000 by the company.

Now lets say the customer orders goods worth $ 20,000 with payment terms of Net
45 2 % ( Meaning if the customer pays for the goods within 45 days of purchase, he
will be given a 2% cash discount. So instead of paying $20,000, the customer would
need to pay ($20,000 – 2% of 20,000) = $ 19,600. This is to encourage timely
payment of their bills and improve cash flow).

The same customer could also place another order for $ 60,000 and still be within his
credit limit.

The value of Order A ( $ 20,000 ) and Order B ( $ 60,000 ) put together is called the
credit exposure of the customer. If the customer places another order for $ 30,000
more, he now exceeds the credit limit set for him.

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So, at the point of ordering (Order C) the customer’s total receivables ( Value of
Order A + Order B ) along with his current order ( Order C ) is checked against this
credit limit. Since the customer exceeds the credit limit set for him, the order would
be blocked.

Credit Exposure = Value of all Open Items + Value of the current Order

$ 110,000 = ( $ 20,000 + 60,000 ) + ( $ 30,000 )

This is a very simple example of credit management. In reality, credit management


can get pretty complicated and not all the scenarios will be covered in this
document.

Types of Credit Management

Types of credit checks:

1. Simple credit check

2. Dynamic Credit check

a. Static Credit Check

b. Dynamic Credit Check

Simple Credit Check


This is very similar to the example we have discussed earlier. Simple credit check
compares the Customer’s credit limit to the total of all the items in the order and the
value of all open items.

Credit Exposure in Simple Credit Check = Value of all Open Items + Value of the
Current Sales Order.

Open items are orders that have been invoiced to the customer but the payment for
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the invoices have not been received yet. The system can be configured to either
block the delivery, send a warning or an error message when the credit exposure has
exceeded the credit limit of the customer.

Dynamic Credit Check


Simple Credit Check alone is not sufficient for most businesses. Instead of just
considering open items only, there is a need to consider existing open orders and
open deliveries as well. Also, for old and seasoned customers, even if the credit
exposure exceeds the credit limit set for the customer, the order can still be
processed because of the good payment history with the company.

However, for new customers credit needs to be strictly monitored. For the purpose of
Credit Management, SAP allows us to recategorize customers into different ‘Risk
Categories’. Some examples of risk categories could be Medium Risk, High Risk, Low
Risk etc.

Dynamic Credit Management can be broadly divided into 2 components.

Static Credit Check Open Deliveries + Open Invoices + Open Items

Dynamic Credit Open Sales Order Value with a Time period ( Called Time
Check Horizon )

Horizon:

The use of time horizon can be best explained with an example. Most orders for the
holiday season are pre-ordered because of the holiday rush. Orders might start to
pile in as early as June, July. The delivery however is to be done in November or
December.

For example, in August , Order A for $ 50,000 is a Pre-Ordered to be


delivered in November.

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Similarly for the month of December, another order, Order B is placed for $
40,000 to be delivered in December.

In case of static credit check, the credit exposure is already $ 90,000. If a


regular order is placed in August for another $ 30,000 the credit exposure
would exceed the credit limit of $ 100,000. However, in case of dynamic
credit check, a horizon of say 2 months would be used to exclude all orders
for which the delivery has to be beyond the stipulated horizon.

So, order C would not be blocked in case of dynamic credit check.

Organizational Structures & Master Data

Monitoring Credit during SD Processing

The master data for those customers whose credit we wish to monitor is created in
SD.We determine how high a customer’s credit limit is to be when creating this data.

Credit Control Area

An organizational unit that represents the area where customer credit is specified
and monitored.Credit Management takes place in the Credit Control Area.A Credit
Control Area can include one or more company codes.It is not possible to divide a
company code into several Credit Control Areas.

Path: IMG -> Enterprise Structure -> Assignment -> Financial Accounting ->
Assign Company Code to Credit Control Area.
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Customization

Customization Settings for Credit Management in SD

1. Define Credit Groups

Credit Group groups together different business transactions which should


be dealt with, in the same manner with regard to credit check.We enter
Credit Groups when we configure the Sales document types for Credit
Management.

The following credit groups are contained in the standard SAP R/3 system:

01 = credit group for sales order

02 = credit group for deliveries

3 credit group for goods issue

2. Set Sales Documents and Delivery Documents for credit


management

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We can specify in Customizing when,at the point of Order, Delivery or Goods
Issue a check on the customer’s credit limit is to take place.We can specify
the Sales document and Delivery document types for which a credit check
should be carried out.We can also specify if Credit check can occur at the
time of Goods Issue.

We can specify the system response if credit check is set.The system can
respond in the following ways:

- Warning Message

The document can be saved.

- Error Message

The document cannot be saved.

- Setting a Delivery Block

The document can be saved, but a delivery block is


automatically set.

3. Set Sales and Distribution document items for credit management

We can specify for each item category whether credit check is to be carried
out.

Path: IMG -> Sales and Distribution -> Basic Functions -> Credit
Management/Risk management-> Credit Management/Risk
management Settings -> Determine Active Receivables Per Item
Category.
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4. Define type and scope of credit checks

• Simple Credit check

A credit limit check can be carried out when sales documents are
created or changed.The check is carried out within one credit control
area. Simple credit check compares the Customer’s credit limit to the
total of all the items in the order and the value of all open items.

• Automatic Credit check

The automatic credit check can target certain aspects during a check
and run at different times during order processing.

We can determine an automatic credit check for any combination of


the following:

- Credit Control Area

- Risk Category of the Customer

- Credit group

Path: IMG -> Sales and Distribution -> Basic Functions


-> Credit Management/Risk management -> Credit
Manageemnt -> Define Automatic Credit Control.

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Example

Now lets see an example, by creating 3 Sales orders.

Check the Credit Limit for the Customer.

Transaction Code: FD32


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Here the Credit limit is set at 1,000,000 and the credit exposure is currently 0.

Now lets start creating the orders.

Transaction Code: VA01

Order Value 1: 200.000,00

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Create a second Order.

Order value 2: 600.000,00

The credit exposure now is 800,000 ( 200,000 + 600,000 )


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Create a third order.

Order value 3: 300.000,00

We get the following error message when we create the Order, because the total of
the net document value and the open items value has exceeded the credit limit of
the customer.

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