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http://wiki.sdn.sap.com/wiki/display/ERPFI/Accounts+Receivable+-+Credit+Management 

Applies to:


All SAP versions 

Summary

The page explains the importance of credit management to a business and basic settings needed to be done to set up credit management in SAP.


Author(s):  Sowmyadeepthi KVN


   
Company:     Infosys Ltd.
Created on:    03/06/2012

Author(s) Bio
Name: Sowmyadeepthi KVN

Company name : Infosys Ltd.

Field : SAP FICO


Credit Management : Importance

Regardless of the type of business involved in, one factor which is most important to keep it running is cash. Most businesses are closed down because they become insolvent due to improper management of cash flows. Outstanding receivables or bad debts can have a considerable impact on a company’s performance. One aspect which goes a long way in helping to have well managed cash flows is credit management or credit policy towards customers. Organizations today are recognizing the importance of this aspect and hence, most of them have a dedicated system for this too. Good credit management forms an essential part of the organization’s strategy. It is as important as the sales and profits on the P&L statement but should not deter excellent customer service.

Credit management 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 granted changes. For some customers, the risk perceived may be high such that we may demand payment in advance.

This credit management forms a part of Sales and Distribution (SD) as well as Account Receivables (AR). The various roles of this policy are:** Maintaining good cash flow

    • Reducing the risk of bad debt
    • Managing the company’s largest asset – Debtors
    • Minimizing the cost of granting credit
    • Promoting good customer relations and prompt payment
    • Finally, contributing to maintaining healthy company profits.For this, we have to determine the financial situation of a customer or group of companies, recognize early warning signals, and make decisions more easily with reference to the credit assignment. This is especially important if we do business with customers in financially unstable sectors or countries, or trade with countries that are politically instable or that adopt a restrictive exchange rate policy.

Credit Management in SAP

Assuming that we already have SD and AR implemented, credit management can be broadly used to:

    • Assign credit limit to customers
    • Facilities like the credit master sheet or early warning list help you monitor the customer’s credit situation
    • Automatic credit limit checks as well as the points at which they have to be carried out can be specified
    • The credit representative is automatically alerted to 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.
      Take for instance a simple process flow through which the way credit management is handled by SAP can be understood:
  1. A sales order is entered

Assuming that this sales order leads to the credit limit being exceeded for this customer, the system now responds in one of two ways

          • It outputs an error message preventing from saving the order.
          • It outputs a warning message, does not prevent from saving the order but blocks it.

In the second case:

  1. One can processes the blocked order either from a list of blocked sales and distribution documents, or from his/her Mailbox. From the list of blocked documents information functions, such as credit master sheet and early warning listcan be used make the decision.
  2. Once the order is released, a delivery can be created and a billing document generated. Once this document is saved, the system automatically creates a financial accounting document.
  3. The customer pays the invoice that was created in the previous step. Post the incoming payment in Accounts Receivable.

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:

  • Decentralized credit management - Every company code has its own credit control area. Hence, we can define credit limits for a customer sperately for each company code.
  • Centralized credit management - 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.

Credit limits and credit exposure are managed at both credit control area and customer level. It is to be noted that a company code cannot be divided into multiple credit control areas.

Credit Limits

The credit limit is that total combined value of the following

  • Open Sales Order -> A sales order which has been created but not delivered
  • Open Deliveries -> An order which has been delivered but not yet invoiced
  • Open Billing Document -> Value of billing document which has not yet been forwarded to accounting
  • Open Items -> Items which have been forwarded to accounting but not yet settled.

Note : Special G/L transactions and postings with an alternative reconciliation account can be excluded from credit limit check using settings in the system

Defining Credit Control Area

To define a credit control area, use the t-code OB45 or the menu path SPRO -> IMG -> Enterprise Structure -> Definition -> Financial Accounting -> Define Credit Control Area  

  • Use the button New Enteries to create a new credit control area or double click on a entry to change an already existing one

 

  • Give the name and long descirption for the credit control area. The name is a four-charecter alpha numeric key.
  • Specify the currency in which this area is to be managed
  • The type of update choosen controls when the values of open sales orders, deliveries and billing documents are updated depending upon the type of document being generated
  • FY Variant is used to specify the fiscal year variant for the credit control area. Useful especially when it contains multiple company codes having different fiscal years
  • Default data can be specified for new customers created in the company codes under the credit control area. Atleast one of the three fields if specified ensures that a credit restriction will be applicable to new customers as soon as they are created since the default data helps automatically create a credit master record
  • If the All company codes check box is set, it implies that credit control area is permitted for postings in every company code created in the system

Note : In the simplest case, each company code corresponds to one credit control area. In this case, it is recommended to use the same key for the credit control area as for the company code.

Assigning Company code to Credit control area

Each credit control area created in the system has atleast one company code. Use t-code OB38 or the menu path SPRO -> IMG -> Enterprise Structure -> Assignment -> Financial Accounting -> Assign Company Code to Credit Control Area

 

Specify the credit control area name in the CCAr field corresponding to the company codes to which it has to be assigned. The last check box named overwrite CC area if checked, will help overwrite the credit control area derived from the company code global data with the one specified here during document posting.

Derivation of Credit control area

Credit control area can be derived in any of the below given 4 ways. The sequence of derivation is as follows

  • User exit EXIT_SAPFV45K_001 derives it from all the fields in the sales order header
  • Sales area if in customizing of SD, sales areas have been assigned to credit control areas
  • Customer master
  • Company code

Customers-Company codes-Credit control areas

  • If a customer is created only in one company code, the simplest case possible, the credit control area for that company code controls the customer limits
  • If a customer is created in many company codes which fall under a common credit control area, then this credit control area itself controls the customer limits
  • However, if a customer is created in many company codes which fall under different credit control areas, a separate credit limit is managed for the customer in each of the different credit control areas.

Customer credit management

For each customer, credit limits are specified in the particular credit master record. If the customer exists in multiple credit control areas, individula limit can be speficied 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.

The customer credit management is done using t-code FD32 or the menu path SAP Easy Access Menu -> Accounting -> Financial Accounting -> Account Receivable -> Credit Management -> Master Data -> Change

 

As seen in the screen shot above, enter the customer number and the credit control area for which the data for the customer credit is to be maintained. There are 5 check boxes which can be selected/de-selected based on the screens which we want to view. There are 5 check boxes corresponding to 5 screens:

  1. Overview Screen

 

It gives an overview of credit settings of the customer.

  • Customer‘s credit limit, credit exposure, percentage of credit limit used and horizon (as applicable in dynamic credit check) are presented as status
  • Payment history along with the average number of days taken for payment is shown
  • Payment data contains details such as authorized cash discount and unauthorized cash discount that was available for cleared items, the outstanding receivables in sales days
  • Dunning data consists od dunning area for the customer, when he was last dunned and the dunning level reached during the last dunning run
  • Control contains the credit risk category of the customer, date of the last check on customer credit limit, if the customer is blocked for credit management business transactions, the credit representative group responsible for the customer, the payment history classification, the financial standing of the customer and date when the credit check of the customer was carried out last.

 

  1. Address -> gives the customers address details

 

 

  1. Central Data

 

It gives an overview of central credit limit settings of the customer.

  • The maximum permitted credit limit as a total of limits across all credit control areas to which the customer is assigned
  • The maximum permitted individual credit limit that a customer can have under any one credit control area
  • The currency in which the two maximum limits are specified. This is because we can enter the central data in any currency of choice, independently of the currencies of the control areas
  • The currently exhausted credit limit as a total (percentage) across all credit control areas to which the customer is assigned (should be less than or equal to max limit)
  • The currently assigned largest credit limit across all credit control areas to which the customer is assigned (should be less than or equal to max limit)
  • Date on which the most recent general information about the customer was obtained

 

  1. Status

 

Shows the customer's actual individual details according to particular credit control area

  • The credit limit for the credit control area, credit account if the limit is to be specified for a group of customers, the percentage of credit exposure, horizon date to be taken into consideration, the receivables, special G\L transactions and the order value not yet transferred to FI used for the credit exposure calculation as well as the amount of secured receivables is shown under credit limit data
  • The credit risk category, credit representative group, customer credit group and customer group used mainly for sorting or reporting, the reference data for customer credit review, if the customer is blocked for credit management business transactions, the last and next internal review date for the customer credit limit as applicable to the particular credit control area are shown under Internal data
  • The date of last external review, the credit information number as applicable to external agency, the classification of payment history of the customer as well as the financial standing is shown under external data

 

  1. Payment history -> displays the payments made by the customer for a particular credit control area

 

Resetting credit limits

The credit control area can be changed only if there are no subsequent documents or transactions done in it. Otherwise, the credit limit needs to be restructured. This resetting is used if:

  • A company code is to be assigned to a new credit control area
  • The assignment of company codes to credit control areas is to be changed
  • The currency of a credit control area is to be changed
  • The classification of a difference reason code from disputed to non-disputed (or vice versa) is to be altered

This resetting can be done using t-code F.28 or the menu path SAP Easy Access Menu -> Accounting -> Financial Accounting -> Account Receivable -> Credit Management -> Tools  -> Reset credit limit

 

Enter the customer and credit control areas as needed and execute.

SD functions in credit management

The following SD functions can be done through credit management screen. They are found under the path SAP Easy Access Menu -> Accounting -> Financial Accounting -> Account Receivable -> Credit Management -> Sales and Distribution Documents

  • Processing SD documents blocked for delivery – VA14L
  • Processing incomplete SD documents – V.01
  • Processing deliveries – VL06
  • Processing billing documents – VF05
  • Released SD documents – VKM2
  • All SD documents – VKM4
  • Sales documents – VKM3
  • Delivery documents – VKM5

The following SD functions are found under the path SAP Easy Access Menu -> Accounting -> Financial Accounting -> Account Receivable -> Credit Management -> Exceptions

  • Processing blocked SD documents from a list – VKM1
  • Processing blocked SD documents from SAP office inbox – SO01

In t-codes VKM1, VKM2 and VKM4, documents can be listed based on the following criteria:

  • Credit control area
  • Credit representative group
  • Next shipping date
  • Credit account
  • Risk category
  • Customer credit group

 

For the document selected, the following options are available:

  • Grant the credit and release the document
  • Reject the credit and cancel the document
  • Forward the blocked document to another processor
  • Recheck the blocked document
  • Reassign the blocked document and specify a new sequence of documents. This enables to give priority to and release several documents with a low document value until their credit limit is completely used up, instead doing so for a single document with a high document value that has already exceeded its credit limit.

 

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