Credit and Risk Management in FI/SD

Credit Management

Purpose

Outstanding receivables or bad debts can have a substantial effect on the success of your company, but with the aid of Credit Management you can minimize your credit risk by defining specific credit limits for your customers. Thus you can take the financial pulse of a customer or group of customers, identify early warning signs, and enhance your credit-related decision-making. This is particularly useful if your customers are in financially unstable industries or companies, or if you conduct business with countries that are politically unstable or that employ a restrictive exchange rate policy.

Integration

If you are using the Accounts Receivable (FI-AR) component to manage your accounting and an external system for sales processing, Credit Management enables you to issue a credit limit for each customer. Every time you post an invoice (created in FI-AR), the system then checks whether the invoice amount exceeds the credit limit. Information functions such as the sales summary or early warning list help you to monitor the customer’s credit situation.

If you are using both the Accounts Receivable (FI-AR) component to manage your accounting and the Sales and Distribution (SD) component for sales processing, you can also use Credit Management to issue credit limits for your customers. You can make settings in Customizing to decide the scope of the check and at what stage in the process (for example, order entry, delivery or goods issue) a credit limit should take place. General information functions are also available for use with credit checks.

Features

If you are using both the SD and FI-AR components, 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, order entry, delivery, goods issue) the system carries out these 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.
• You can also work with Credit Management in distributed systems; for example if you were using centralized Financial Accounting and decentralized SD on several sales computers.

You can find information about where to make Customizing settings for Credit and Risk Management in Settings for Credit and Risk Management

Risk Management for Receivables

See Risk Management for Receivables in SD for information about managing risks for receivables.

Monitoring Credit During Sales and Distribution Processing

Purpose

This process enables you to monitor credit when processing customer orders.

Prerequisites

• You have implemented the Accounts Receivable (FI-AR) and Sales and Distribution (SD) application components.
• The master data for those customers whose credit you wish to monitor is created in both Sales and Distribution and Financial Accounting.
• The master data for those customers whose credit you wish to monitor is created. In creating this master data, you determine how high the customer’s credit limit is to be.
• In Customizing for Enterprise Structures you defined one or more credit control areas and assigned these to one or more company codes.
• In Customizing for Sales and Distribution you defined at which point (when an order is received or when delivery is carried out for example) the credit check should take place. You do this under Basic Functions ® Credit Management/Risk Management ® Credit Management ® Define Automatic Credit Control.

Process flow

1. You enter a sales order.

Assuming that this sales order leads to the credit limit being exceeded for this customer, the system now responds in one of two ways (depending on the settings you made in Customizing for Sales and Distribution.) For more information, see Automatic Credit Control

- It outputs an error message, preventing you from being able to save the order.

- It outputs a warning message, but does not prevent you from being able to save the order.

- It blocks the order.

If the order is blocked, the credit representative processes the blocked order either from a list of blocked sales and distribution documents, or from his/her Mailbox. You define whether or not a mail is sent to a credit representative in Customizing under the menu path Logistics - General ® Promotion ® Message Determination.

The credit representative now decides how to proceed with this order. To assist, from the list of blocked documents he or she can use the Information Functions (credit master sheet, early warning list and so on) in Credit Management.

3. Once the credit representative releases the order, a delivery can be created and a billing document generated.

Once you have saved this document, the system automatically creates a financial accounting document.

4. The customer pays the invoice that you created in the previous step. You then post the incoming payment in Accounts Receivable.

Processing an Accounting Transaction Using Credit Management

Credit Control Area Credit and Risk Management in FI/SD

Definition

An organizational unit that represents the area where customer credit is awarded and monitored.

This organizational unit can either be a single or several company codes, if credit control is performed across several company codes. One credit control area contains credit control information for each customer.

Use

Credit and risk management takes place in the credit control area. According to your corporate requirements, you can implement credit management that is centralized, decentralized, or somewhere in between.

• For example, if your credit management is centralized, you can define one credit control area for all of your company codes.
• If, on the other hand, your credit policy requires decentralized credit management, you can define credit control areas for each company code or each group of company codes.

Credit limits and credit exposure are managed at both credit control area and customer level.

You set up credit control areas and other data related to credit management in Customizing for Financial Accounting. For more information, see the Implementation Guide under Enterprise Structure ® Definition or ® Assignment ® Financial Accounting and then Maintain credit control area. You assign customers to specific credit control areas and specify the appropriate credit limits in the customer master record.

See also: Specifying Credit Limits by Credit Control Area

Credit and Risk Management Settings: Overview

Structure

The following graphics illustrate the relationship between credit control area, company code, sales organization, customer and currency for central or decentralized credit management respectively.

Decentralized Credit Management

If your credit policy requires decentralized credit management, you can define credit data for your customer for each company code. In the graphic below, the customer has a business relationship with two company codes:

You define a currency for each credit control area. The relationship between credit control area, company code, sales organization and currency is illustrated in the following graphic:

Central Credit Management

If your credit management is centralized, you can combine your company codes in one credit control area. Credit management then regards the customer as valid for all company codes. In the following graphic, the customer has a business relationship to two company codes that are combined in one credit control area:

The next graphic illustrates the relationship between the credit control area, company code, sales organization and currency in a central organization. If the credit control area includes company codes with different local currencies to that of the credit control area, the system converts the receivables into the currency of the credit control area.

This also applies to the open order, delivery and billing values.

Deriving the Credit Control Area Credit and Risk Management in FI/SD

You have four ways of deriving a credit control area:

• Company code
• Sales area (sales organization, distribution channel, division)
  The sales areas can be assigned to a credit control area in Customizing (Enterprise Structure ® Assignment ® Sales and Distribution ® Assign sales area to credit control area).
• Customer master (payer’s sales area segment)
• User exit EXIT_SAPFV45K_001
  You can use this user exit to derive the credit control area from all the fields in the sales order header.

In the last three options, the credit control area must also be assigned to the company code. You do this by going to Customizing and choosing Enterprise structure ® Assignment ® Financial Accounting.

Caution
If you are working with distributed systems, note the following (and also see Credit Management in Distributed Systems):

In distributed systems (centralized Financial Accounting, decentralized sales processing), each decentralized sales computer must be assigned to its own credit control area. In other words, you cannot make multiple assignments for one credit control area.

The alternative credit control areas in the decentralized computer must also be different, which makes the following scenario impossible:

The central Financial Accounting department in your company would like to influence the credit policy for some customers in an international subsidiary that uses a decentralized sales computer. To do this, the centralized and decentralized sales computers would have to belong to the same credit control area. However, this is not permitted for distributed systems because open orders are not distributed between sales computers.

If you post documents directly in FI that are not related to sales and distribution processes, you must enter the credit control area manually as the system doesn’t.

The credit control area is determined in the following sequence:

1. User exit
2. Distribution channel
3. Customer master
4. Company code for the sales organization

You can only change the credit control area if there are no subsequent documents. If you want to change the assignment or make a new one, you have to restructure the credit limit. For more details, see Resetting Credit Limits

Specifying Credit Limits by Credit Control Area

Credit limits are normally specified by credit management staff in the individual customer master records. You can specify individual credit limits for each credit control area. You can expand your credit control for a customer by specifying a central credit limit for all credit control areas to which that customer is assigned. The total of the limits at the level of the credit control area must not exceed the total limit for all credit control areas. The credit limits at the control area level are checked during sales order processing.

In the following graphic, a central credit limit has been divided between the two credit control areas D1 and D2. The total limit at group level of 10,000 USD corresponds to the total of the individual limits at credit control area level. The individual limits do not exceed the upper limit of 7,000 USD specified by the group.

Creating Credit Data Credit and Risk Management in FI/SD

Prerequisites

You created a customer master record for the customer in question.

Procedure

1. From the
Credit Management screen, choose Financial accounting data ® Master records ® Maintain.

Enter the name of your customer, the credit control area and the views (Address, Status, Overview for example) with which you want to work.

The total credit limit and the credit limit per control area are both maintained under Central data.

You enter the credit limit itself under Status.

2. Choose the Central data screen and enter the following data:

- Total amount

- Individual limit

- Currency

Enter the currency for the total limit and maximum individual limit.

The credit limit is managed in a separate credit limit currency, which you determine for each control area. This currency is separate from the local (company code) currency. To update the credit limit data, the system converts the amounts. This has no effect on the updating of the transaction figures or on any postings.

You can enter the central data in any currency you choose, independently of the currencies of the control areas.

- The fields in the section entitled Current credit limit assigned show to what extent (as a percentage) the customer has exhausted the amount of credit granted to him and in which credit control area the maximum individual credit limit has been exhausted to the greatest extent.

- The Last general info field displays when the last information on the customer was obtained.

3. Now access the Customer Credit Management Change: Status screen and enter the individual credit limit for the customer.

If you wish, you can also enter the following data on this screen:

A/R Summary Data	A/R summary data is used in Decentralized Credit Management. This data enables several decentralized SD systems to operate active Credit Management in conjunction with a central FI system. It contains all the (summarized) information on a credit management account (in a credit control area) that is necessary for the credit check in SD. Even in a non-distributed system, it may be advisable to run the SD credit check against this A/R summary since reading this data is much less time-consuming than repeatedly reading open items (thus improving system performance.) The data determined in this way from the A/R summary can be integrated in the credit overview in line layout variants. You can then identify those credit management accounts for which the credit check will report an error when the next incoming orders are made.
Risk Category	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. This risk category determines which checks the system should carry out when processing orders in Sales and Distribution.
Credit Representative Groups	You can assign credit management employees to a credit representative group. The credit representative group is transferred into the order and can be used as a selection criterion for evaluations and release functions.
Customer Credit Group	You can define groups of customers in accordance with your company’s needs. Customers can for example be grouped by industry, country or other criteria that help you carry out Credit Management more specifically. The credit representative can use these groups to select blocked documents for processing and to generate reports for statistical analysis.
Customer Group	You can group customers into customer groups according to criteria that you yourself define. For example, you can group customers by industry or country. This customer group enables you to process this customer group more specifically or to carry out evaluations for this customer group.
Texts	At credit control area level, you can enter memos for each customer. You define this memo as a certain text type (for example, internal information). Which text types are relevant depends on the way your system is configured. For each text type, you can create a new text in another language. Central texts for a customer are entered in the customer master record in the general data area. If texts for this customer exist, the Text exists field is marked. See also: Entering Texts
Storing Documents on the Customer	If you implement SAP’s ArchiveLink, you can store documents for each customer. You can then scan annual reports into the system, assign them to a customer and display them using the master record display function. The system creates documents for a customer in the general data area of the customer master record. To display a document for a customer at the credit control area level, or to assign a new document, on the Customer Credit Management Change: Status screen, choose Extras ® Documents. The system displays a dialog box in which the linked documents are shown. You can also assign a new document to the customer here. See also: Assigning Documents

4. Save your data.

Result

You have created the credit data for a customer.

Credit Limits for Groups of Customers Credit and Risk Management in FI/SD

Use

You can assign a credit limit to both a group of customers and an individual customer. If your company has different branches, you would define the credit limit for just one customer of this group (the head office) and this customer account then becomes the credit account.

Procedure

1. To assign a credit account to a branch account, from the
Credit Management screen, choose Financial accounting data ® Master records ® Maintain.

Enter the name of your customer, the corresponding credit control area and select the Status indicator.

The system displays the Change Customer Credit Management: Status screen.

2. Choose the function Edit
® Change credit account. In the dialog box that appears, you can enter the credit account (the account number of the customer you are using) to set the credit limit for the entire group.

After you choose ENTER, the system contains the credit limit of the branch as 0.00. The Credit account field displays the account number of the customer for which the reference credit limit is defined.

You can only specify a credit account within a credit control area.

The accumulating total of receivables is recorded both for the reference customer and the "dependent" customer. However, the system checks only against the reference customer as to whether the credit limit has been exceeded.

When displaying the credit account, you can view which customers are referenced to this account. To do this, from the credit account master data screen, choose Edit ® Cust. for credit acct.

Result

You have assigned a credit account to a branch account.

Defining Credit Limits for New Customers Credit and Risk Management in FI/SD

Use

If you create a master record for a new customer, but do not define any credit data, no credit control is performed for this customer. If you want a new customer to be automatically subject to credit control, then you need to create a credit control area for new customers.

Procedure

1. In Customizing, choose Enterprise Structure
® Definition ® Financial Accounting ® Maintain credit control area.
2. Now choose Edit
® New entries.

Enter a Credit control area (for example NEW) and enter data in at least one of the Risk category, Credit limit, and Rep.group fields.

3. Save your data.

Result

You have now created a credit control area for new customers for which a credit check is effective as soon as the customer has been created.

Processing Credit Data Credit and Risk Management in FI/SD

All of the following functions are accessed from the Credit Management screen.

Function	Menu path	Further information
Changing Credit Data	Financial accounting data ® Master records ® Maintain
Displaying Credit Data	Financial accounting data ® Master records ® Display	Displaying Credit Data
Making Mass Changes	Financial accounting data ® Master records ® Bulk change	The system may prevent you from making postings to customers if the date of the next credit limit check has already passed. To prevent this happening, you can reset the date to a later date for a certain specified number of customers.
Displaying Changes to Credit Data	Financial accounting data ® Master records ® Display changes.	To display changes to credit data on a cross-account basis, use report RFDKLIAB.
Deleting Credit Data	Financial accounting data ® Master records ® Maintain. Enter the name of your customer, the corresponding credit control area and select either Status or Central data. Choose Credit management ® Delete ® Central data or Control area data.
Resetting Credit Limits		Resetting Credit Limits

Displaying Credit Data Credit and Risk Management in FI/SD

Use

Monitoring a customer’s credit situation.

Procedure

1. From the
Credit Management screen, choose Financial accounting data ® Master records ® Display.

By choosing Extras and Environment, you can display a customer’s payment data, dunning data, and view their payment history.

2. Choose the views Overview and Status and choose Enter.

On the Customer Credit Management Display: Overview screen, the system displays the individual credit limit, the existing total liabilities, and the credit limit used (percentage).

The Day Sales Outstanding (DSO) figure is also displayed. The DSO figure is an index of the relationship between outstanding receivables and sales achieved over a given period. In the standard system, this figure is calculated by taking into account current receivables, and a period of 3 months plus the days of the current month. When displaying the credit management data for a given customer, the basis on which the DSO figure is calculated can be viewed by choosing Extras ® DSO calculation.

In Customizing for Financial Accounting, you can define other parameters by which DSO is calculated. You do so in the activity Define Preliminary Settings for Credit Management.

If you have recorded the customer’s payment history (see the indicator Rec.pmnt hist. indicator under Payment transactions view in the customer master record) or made other internal specifications, this data is also displayed here.

3. Choose Enter. The system displays the Customer Credit Management Change: Status screen

on which the following data is displayed:

- Receivables from sales (unless they are marked as disputed items)

- Special liabilities relating to special G/L transactions which you marked as credit limit-relevant (down payments for example)

- Sales value

By choosing Extras ® Sales value you can break the sales value down into open orders, open deliveries and open billing documents.

- Credit exposure

When you post a customer invoice or create a billing document, the system automatically adds the amount to the existing receivables or to the receivables from special G/L transactions. When you post the incoming payment, the amount is subtracted from current receivables.

Resetting Credit Limits Credit and Risk Management in FI/SD

Use

You need to reset credit limits if you have:

• Assigned a company code to a new control area
• Changed the assignment of company codes to control areas
• Changed the currency of a control area
• Altered the classification of a difference reason code from disputed to non-disputed (or vice versa).

Procedure

1. Execute transaction SE38.
2. In the Program field enter RFDKLI20 and choose Execute.
3. Enter the relevant data.
4. Choose Program ® Execute in background.

Result

The customer’s credit limit is now reset.

Authorizations Credit and Risk Management in FI/SD

You can set up authorizations for your credit representatives according to the following criteria:

• How much of the available credit limit a particular customer has already used

• The value of a particular sales order or delivery

Authorization According to Credit Limit

A representative is assigned to a credit representative group and can be authorized to process credit holds for a customer up to a certain level within the customer's credit limit.

A representative may be authorized to process credit holds for customers within a particular risk category whose total credit exposure is below 80% of the allowed credit limit. For customers whose credit exposure is approaching 100% of their credit limit - in other words, becoming potentially critical - you may want to direct credit holds to senior credit personnel.

Authorization According to Document Value

Document value classes enable you to authorize credit representatives to process documents up to a certain value. You start by defining different classes to reflect the ranges of document value that occur in your business. You can then assign particular credit representatives to particular document value classes.

A group of representatives may be authorized to process credit holds where the document value is less than 1,000 USD. However, only the group's manager may authorize credit for documents with values of over 1,000 USD. Sample document value classes are as follows:

Credit control area	Amount up to	Document value class
EURO	100.00	A01
EURO	1,000.00	A02
EURO	10,000.00	A03

Date of Next Review Settings for Credit Management and Risk Management

When a credit representative reviews the credit situation of a particular customer, he or she can manually enter a date for the next credit review. You can specify the next review date as one of the criteria that trigger an automatic credit check. For example, if you process a sales order later than the next review date, the system displays an error message, warning, or blocks the order.

External Credit Data Settings for Credit Management and Risk Management

Allows you to enter credit data about a customer from external sources. The standard version of the SAP R/3 System is set up for Dun & Bradstreet data. For example, you can enter the D & B credit information number (DUNs number) that refers to the customer, as well as the D & B indicator and rating. You can also see how up-to-date the external information is by entering the date you last acquired data.

Customer Credit Group Settings for Credit Management and Risk Management

Your credit manager can freely define groups of customers according to your needs. For example, you can define groups of customers by industry sector, by country, or by any characteristic that will help you focus your credit management. Credit representatives can use these groups to help select credit holds for processing and to generate reports for statistical analysis.