Credit Management in Sap Sd

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Credit Management in Sales and

Distribution

Applies to:

Credit Management in Sales and Distribution. For more information, visit the Enterprise Resource Planning Homepage.

Summary

This document illustrates what is SAP SD credit management and how to configure it in a systematic manner. It also explains how a new incoming sales order is checked against the customers credit limit. It shows how credit management supports the information flow between different departments within a company to make quick and efficient credit decisions.

Author: Priyadharshini Shanmugasundaram

Company: Applexus Technologies Pvt Ltd Created on: 6 May 2011

Author Bio

Priyadharshini Shanmugasundaram is currently working as SAP Technical Consultant in Applexus Technologies Pvt Ltd.

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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 (customer’s credit limit). The number of days for which credit is extended is based on the payment terms associated with that transaction.

i.e.,If the customer’s credit limit is 20,000 and if he creates an order worth 16,000 with payment terms of Net 45 2% i.e., if money is paid within 45 days of purchase, the customer will get 2% discount),he needs to pay (16,000 – 2% = 15600).

Purpose of Credit Management

Credit Management enables you to minimize the credit risk yourself by specifying a specific credit limit for your customers. Thus you can take the financial pulse of a customer or a group of customers, identify warning signs earlier, and enhance credit related decision making.

Features

Credit Management includes the following features:

 Depending on your credit management needs, you can specify your own automatic credit checks based on a variety of criteria. You can also specify at which critical points in the sales and distribution cycle(for example : sales order entry, delivery, goods issue) the system carries out the checks.

 During order processing the credit representative automatically receives information about a customer’s critical credit situation.

 Critical credit situations can also be automatically communicated to credit management personnel through internal electronic mail.

 Your credit representatives are in a position to review the credit situation of a customer quickly and Credit Limit of Customer A

is 20,000

Sales order A worth 16,000

Sale Order B worth 12,000

Order delivered and money Paid within 45 days of purchase.

Exceeds credit limit and blocked for delivery

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Types of Credit Management

Types of Credit Checks:

 Simple Credit Check  Automatic Credit Check

 Static Credit Check  Dynamic Credit Check Simple Credit Check:

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 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.

Automatic Credit Check:

Instead of just considering open items only, we need to consider 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 be still processed because of the good payment history with the company. This is broadly classified into two:

 Static Credit Check  Dynamic Credit Check Static Credit Limit Determination:

Checking Group + Risk Category + Credit Control Area

Checking Groups:

Types of Checking Groups 01) Sales 02) Deliveries 03) Goods Issue

At all these 3 levels order can be blocked.

Risk Category: Based on the risk category the company decide how much credit has to give to the Customer. High Risk (001): Low Credit

Low Risk (002): More Credit Medium risk (003): Average Credit

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Dynamic Credit Check Determination:

Dynamic credit check checks all these document value and check with the credit limit by considering the horizon period. 1) Open Doc 2) Open Delivery 3) Open Billing 4) Open Items 5) Horizon Period

If the Horizon period is 4 months, the system will not consider the above 4 documents for 4 months. That is if the delivery period is after 4 months, the system will not consider the document. The system considers the document only if the delivery period of the open document is within 4 months.

Settings

Credit Control Area:

Credit management takes place in the credit control area. It is an Organizational unit that represents the area where customer’s credit limit is specified and monitored.

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.

1. Assign Company Code to Credit Control Area.

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

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Settings for Automatic credit check: 2. Define Credit Groups

Path: IMG -> Sales and distribution -> Basic functions -> credit management/Risk management -> Define credit groups

Credit Group is used to combine different document types for the purpose of credit.

Management.Using credit group we can define at what level the credit limit is checked for the customer.

If we are using simple credit check, we need not assign credit group to the Document type. The following credit groups are contained in the standard SAP system:

01 = credit group for sales order 02 = credit group for deliveries 03 = credit group for goods issue

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3. Define Risk Categories

Path: IMG -> Financial Accounting -> Accounts receivable and accounts payable -> Credit management -> define risk categories

In order to classify customers according to the risk they represent and to trigger the relevant checks, you can assign a risk category to a customer. The risk category determines which checks the system should carry out when processing orders in Sales and Distribution.

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Here you can notice that the credit control area ‘INFC’ is assigned to the risk category ‘001-Low Risk’.

4. Assign Sales documents and delivery documents for credit management.

Here we can specify for which sales document type or delivery document type the credit limit is to be carried out and at what point of time the credit check has to take place whether order or delivery or post goods issue.

If the credit check is set, the system will respond according to the following ways : Warning message – The document can be saved.

Error message - The document cannot be saved

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Credit limit check for order types.

Credit limit check for delivery types.

5. Set Sales and Distribution document items for credit management

We can also 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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6. Define Automatic credit control

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Checks:

Static Credit Limit Check:

The customer’s credit exposure may not exceed the established credit limit.The credit exposure is the total combined value of all the items:

Open Orders- The open order value is the value of the order items which have not yet been delivered. Open Deliveries-The open delivery value is the value of the delivery items which have not yet been invoiced. Open billing documents-The open invoice value is the value of the billing document items which have not yet been forwarded to accounting.

Open Items(accounts receivable)-The open items represent documents that have been forwarded to accounting but not yet settled by the customer

Dynamic credit limit check with credit horizon:

Dynamic credit check checks all the document value by considering the horizon period.The open order value includes all undelivered or only partially delivered orders. The value is calculated on the shipping date and stored in an information structure according to a time period that you specify (days,weeks, or months). When you define the credit check, you can then specify a particular horizon date in the future (for example: 10 days or 2 months, depending on the periods you specify). For the purposes of evaluating credit, you want the system to ignore all open orders that are due for delivery after the horizon date.

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 is not yet been defined for a new customer. It is initiated by a risk category which is defined specifically for new customers.

Critical Fields:

The credit check is triggered by changes made in the document to values in any of the credit-sensitive fields. If a check in this field is carried out, the following fields are relevant :

Payment terms Additional value days Fixed value date

Next/Review date :

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.

Open items :

Specifies whether the system carries out a credit check based on open items. This type of credit check works in conjunction with two values that you specify in the adjacent fields :

 Maximum percentage of overdue items in open items  Number of days which the open items are overdue

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User-defined Checks :

If you want to carry out checks other than the standard checks, you can define your own checks in the appropriate user exits.

Settings for simple credit check:

For simple credit check, there is no need to assign the credit group to the document type. you can simply assign where the check should happen while processing the order.

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Let us see an example by creating sales orders:

Creating a sales order having value 20,000.

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Now create another sales order having value of 10,000.

Sales Order2:

Now total value of the open sales orders is 20,000 + 10,000 = 30,000.Now let us check whether the system is giving warning message, if the sales order which we are going to create exceeds the credit limit of the customer.

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