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. 2011 SAP AG 1
Table of Contents Credit Management... 3 Purpose of Credit Management... 3 Features... 3 Types of Credit Management... 4 Simple Credit Check:... 4 Automatic Credit Check:... 4 Static Credit Limit Determination:... 4 Dynamic Credit Check Determination:... 5 Settings... 5 Checks:... 12 Related Content... 16 Disclaimer and Liability Notice... 17 2011 SAP AG 2
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). Credit Limit of Customer A is 20,000 20,00-15,600= 4400 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 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 accurately and, according to your credit policy, decide whether or not to extend credit. 2011 SAP AG 3
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 2011 SAP AG 4
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 2011 SAP AG 5
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 2011 SAP AG 6
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. 2011 SAP AG 7
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 Setting a delivery block The document can be saved but a delivery block will be set automatically. 2011 SAP AG 8
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. 2011 SAP AG 9
Here you can check the credit active checkbox to activate the credit check for the corres[ponding item category. 2011 SAP AG 10
6. Define Automatic credit control Here you can notice that the credit group 01 is assigned to the credit control area INFC. 2011 SAP AG 11
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 Oldest Open Item : Indicates whether the system carries out a credit check based on the age of the oldest open item.the oldest open item may not be more than a specified number of days overdue. High Dunning level : The customer s dunning level may only reach a specified maximum value. 2011 SAP AG 12
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. This means that, for the document type XR, the credit limit is checked at the time of delivery (B). 2011 SAP AG 13
Let us see an example by creating sales orders: Creating a sales order having value 20,000. Sales Order1: Since the credit limit of the customer is 50,000, no credit check will happen. 2011 SAP AG 14
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. Sales Order3: If the system gives a warning message the sales order will be saved. If it gives an error message, it will not be saved. If you want an error message to be displayed, you can change the settings for credit management as discussed in above steps. 2011 SAP AG 15
Related Content SAP Help Portal SAP Documentation - Settings for Credit Management and Risk Management: Overview For more information, visit the Enterprise Resource Planning Homepage. 2011 SAP AG 16
Disclaimer and Liability Notice This document may discuss sample coding or other information that does not include SAP official interfaces and therefore is not supported by SAP. Changes made based on this information are not supported and can be overwritten during an upgrade. SAP will not be held liable for any damages caused by using or misusing the information, code or methods suggested in this document, and anyone using these methods does so at his/her own risk. SAP offers no guarantees and assumes no responsibility or liability of any type with respect to the content of this technical article or code sample, including any liability resulting from incompatibility between the content within this document and the materials and services offered by SAP. You agree that you will not hold, or seek to hold, SAP responsible or liable with respect to the content of this document. 2011 SAP AG 17