SAP Credit Management

Table of Contents
What is Credit Management ?
Types of Credit Management
Simple Credit Check
Dynamic Credit Check
Organizational Structures & Master Data
Customization
Example

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 customers 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.


So, at the point of ordering (Order C) the customers 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
1. Static Credit Check
2. Dynamic Credit Check
Simple Credit Check
This is very similar to the example we have discussed earlier. Simple credit check compares the Customers 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.

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 Check Open Sales Order Value with a Time period ( Called Time
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 J une, J uly. 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.


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 customers
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.


Customization

Customization Settings for Credit Management in SD
1. 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
1. credit group for goods issue
1. 2. Set Sales Documents and Delivery Documents for credit management
We can specify in Customizing when,at the point of Order, Delivery or Goods Issue a check on the customers 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.
1. 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: I MG -> Sales and Distribution -> Basic Functions -> Credit Management/ Risk management-> Credit
Management/ Risk management Settings -> Determine Active Receivables Per I tem Category.


1. 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 Customers 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: I MG -> Sales and Distribution -> Basic Functions -> Credit Management/ Risk management -> Credit
Manageemnt -> Define Automatic Credit Control.




Example

Now lets see an example, by creating 3 Sales orders.
Check the Credit Limit for the Customer.
Transaction Code: FD32





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


Create a second Order.
Order value 2: 600.000,00



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

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.









How To Do Configuration For Credit Management
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.
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.
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. The implementation guide is 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.
Tips by : Kapilaa
Settings for determining the credit control area of a document. The settings of items 1 - 4 are
taken into account according to their priority. The credit control area found is stored in field
VBAK-KKBER.
1. Transaction OB38
Check which credit control area is assigned to the company code.
Company code:
Credit control area:
2. Transaction OVFL
Check which credit control area is assigned to the sales area.
Sales area:
Credit control area:
3. Transaction XD02 or VD02
Check which credit control area is assigned to the payer.
Payer:
Credit control area:
4. Transaction SE37
Is user exit EXIT_SAPV45K_001 being used?
5. Transaction OBZK
For the settings under items 2 - 4, field "All company codes" must be marked in Transaction
OB45, or the credit control area must be entered under the relevant company code in table
T001CM of the credit control areas allowed.
Company code:
Credit control areas allowed:
v6. Settings for the credit checks
7. Transaction OVAK
Which settings do exist for the sales document type used?
Sales document:
Check credit:
Credit group:
8. Transaction OVAD
Which settings do exist for the delivery type used?
Delivery type:
Credit group for delivery:
Credit group for goods issue:
9. Transaction OB01
Credit management/Change risk category
Definition of the risk category for each credit control area. This risk category can be
assigned to a credit account by using Transaction FD32.
10. Transaction OVA8
Here, the individual credit checks for key fields
o credit control area
o risk category
o credit group are set. Take these key fields from the above settings and go to the detail
screen. In particular, check whether fields "Reaction" and "Status/block" are set
correctly. To carry out follow-up actions in case of a credit block, the credit check
status must be set (field "Status/block").
11. Transaction FD32
Credit master data for the payer of the relevant document.
Credit account:
Credit limit:
Risk category:
Currency:
12. Settings for updating the credit values Update of the credit values is required for the limit
check (static or dynamic credit limit check).
13. Transaction OVA7
Update of the credit value is active for the corresponding item type if the check box is marked.
This field corresponds to
field "Active receivable" in Transaction VOV7.
Item type:
Active receivable:
14. Transaction V/08, Pricing
In the pricing procedure used for pricing, subtotal "A" must be entered in a line for
determining the credit value (mark the pricing procedure and doubleclick on "Control").
Usually, the net value plus taxes is used. This way the system is determined to use this
subtotal for credit pricing. The credit price is stored in field VBAP-CMPRE and used for
update and credit check.
You can find the used pricing procedure of the order under "Item ->Condition ->Analysis".
Pricing procedure:
Line with subtotal ='A':
15. Transaction OB45
Which update group (field "Update") do you use in the relevant credit control area? The
default setting is "12". If you use another update group, check whether this is fine with
you. If you open an OSS message, please tell us the alternative update group.
Credit control area:
Update:
16. Transaction OMO1
Which kind of update did you choose for structure S066?
In any case, "Synchronous update (1)" has to be chosen as the kind of update.
All other settings will lead to errors.