Basic Configuration setting

for Credit Management

created by Mr patchala on May 14, 2012 4:08 PM, last modified by
15, 2012 11:42 PM

Mr patchala

on May

Version 3
inShare12

Hi friends ,
Here i am trying to explain the configuration steps for credit management and this article is for
people who wants the basic and step by step configuration for credit management
In sap there is two different types of credit controls those are 1) Static 2) Dynamic

In Static check there is no Horizon period, and in dynamic you have horizon period.
Horizon period is the duration of the time. If you maintain horizon period as 2 months, then
all the open documents that are with in this period are taken for credit check, documents
beyond that are not for consideration. in static system will consider the all open document
till now.

Configuration settings:
1) Define Risk Category:

SPRO -- > Financial Accounting -- > Account Receivable and Accounts Payable -- > Credit Management
-- > Credit Control Account -- > Define Risk Categories
Go to NEW ENTRIES and create the Risk Category with the combination of Credit Control Area.
Save the record.

2) Define Credit Control Area:

It is the responsible organizational element which takes care of all the credit management activities in
a company code.
SPRO --> Enterprise Structure -- > Definition -- > Financial Accounting -- > Define Credit Control Area.
Go to NEW ENTRIES and create the Credit Control Area.

Note: if you maintain risk category and credit limit in "default data for automatically creating new
customers" , it will automatically apply for new creating customers in future.

3) Assign Company Code to Credit Control Area:

SPRO

--> Enterprise Structure -- > Assignment -- > Financial Accounting -- > Assign Company Code
to Credit Control Area.
Select the Company Code and assign the Credit Control Area to the Company Code.
Save the record.
4) Define Credit Groups:

The credit group specifies which subsequent transaction can be blocked for processing, if the credit
limits are exceeded.
SPRO -- > Sales & Distribution -- > Basic Functions -- > Credit Management and Risk Management -- >
Credit Management -- > Define Credit Groups.
You can use the default credit groups or create new once.

5) Assign Sales Document and Delivery Document to Credit Group:

SPRO -- > Sales & Distribution -- > Basic Functions -- > Credit Management and Risk Management -- >
Credit Management -- > Assign Sales Document and Delivery Document -- > Credit Limit Check for
Order Types.
Select the Sales Document Type and assigned to Check Credit, Credit Group. And save the record.

-- Credit Limit Check for Delivery Types.

-- Select Delivery Document Type and assigned to Delivery Credit Group, Goods Issue Credit Group
-- Save the record.

6) Maintain Credit Limits for Customer:

Logistics -- > Sales & Distribution -- > Credit Management -- > Master Data -- > FD32- Change.
-- Specify the Customer for whom the credit limits has to be maintained
-- Specify the credit control area of the customer.
-- Select all the views and enter.
a) In the overview screen , from the main menu select Go to -- > Control Area Data -- > Status.

Now you have to give value Credit Limit, Risk Category, Last/ Next Interval Review

Note : for only Dynamic check maintain "Credit horizon date" field
b) From the main menu select Go to -- > Control Area Data -- > Payment History.
On this view the system display the payment history of the customer, provided we check the field
Payment History Recorded in the corresponding customer master.
c) From the main menu select Go to -- > General Data -- > Central Data.
Here we have to specify the Maximum Permitted Credit Limits and Save the record.

7) Automatic Credit Control:

During the sales document processing, if the credits are exceeded, the system can automatically block
the required transaction for this we need to configure automatic credit control.
SPRO -- > Sales & Distribution -- > Basic Functions -- > Credit Management and Risk Management -- >
Credit Management -- > Define automatic credit control.
We need to define automatic credit control in the combinations of Credit Control Area, Risk
Category and Credit Group.

Note : 1) you can maintain seasonal discount by specifying "credit limit seasonal factor " tab.
2) in checks tab maintain you want to go for static or dynamic check.
3) specify the system reaction if credit limit is exceeded by "Reaction " check box
a) No massage
b) Warning massage
c) Error massage
4) you can block the order/deliver/pgi by specifying "Status/block" field
5) for dynamic control maintain "Horizon" value
6) for static select " open orders""open delivery`s"

Save the Automatic Credit Control Area.

1.
2.

Note: For the system to carry out the credit limit check during the sales document processing, the
following settings must be done.
1) In the definition of corresponding sales document type, we must not specify the value No
Credit Limit Check for the field Check Credit Limit.
2) In the definition of corresponding item category, we must check the field Credit Active.
Hope you like my explanation..
Regards,
Patchala.

A) Simple Credit Check

B) Automatic Credit Check

A) Simple Credit Check

B) Automatic Credit Check

Static and Dynamic Credit Check both take the following into consideration while performing a credit check.

The customer's credit exposure may not exceed the established credit limit. The credit exposure is the total
combined value of the following documents:

1) Open Orders
2) Open Deliveries
3) Open Invoices
4) Open Items

The open order value is the value of the order items which have not yet been delivered.
The open delivery value is the value of the delivery items which have not yet been invoiced.
The open invoice value is the value of the billing document items which have not yet been forwarded to accounting.
The open items represent documents that have been forwarded to accounting but not yet settled by the customer.

Incase of a dynamic credit check a time horizon factor is taken into consideration for the open orders. Let's assume
you have set the time horizon as 1 month then while performing the dynamic credit check, open orders within the last
1 month would only be considered. Orders prior to this would not be taken into consideration. SAP is given this
feature so that you can avoid very old orders that were entered in the system but were not processed after that.

Incase of a static credit check there is no time horizon period so all the open orders in the system for a particular
customer would be taken into consideration.

Do note the time horizon period is only for the open orders and not for any of the other factors.

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.
2.
1.
2.

Simple credit check

Automatic Credit check
Static Credit Check
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
Check
Dynamic
Check
Horizon:

Credit
Open Deliveries + Open Invoices + Open Items
CreditOpen Sales Order Value with a Time period ( Called
Time 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 June, July. 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.
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: IMG -> Sales and Distribution -> Basic Functions -> Credit Management/Risk
management-> Credit Management/Risk management Settings -> Determine Active
Receivables Per Item Category.

1.
o

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: IMG -> 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.