Credit management is a vital part of any sales organization. I’ll look at credit limit calculation and show how you can organize your credit management using your SAP R/3 or mySAP ERP Central Component (ECC) system. The aim is to create a sensible way to finalize the design on the financial side without unduly hampering the supply chain.

Organizing your credit management involves three steps. First, define your credit control area by deciding how to manage credit. Then, determine how to set up new customers and define default credit limits. Finally, assign the credit control area to one or more company codes, depending on your requirements.

This functionality has been around since R/3 Release 3.0. The prerequisite is the customizing of automatic credit checks in the sales module, which I covered in the first article in this series.

Define Credit Control Area

Mapping your credit control organization to R/3 and ECC means you decide at which level you monitor credit (credit control area) and group customers and credit clerks. The credit control area is your fundamental design decision in the SAP Financials module. See Figure 1 for a comparison of credit control on company and national levels.

Figure 1

Set up your credit control area

In this step you decide whether to manage credit by company code or by a grouping of company codes. The choice depends on your organizational structure. Typically, companies manage credit on a national level, in which case grouping all company codes in national credit areas seems logical. However, if you want to manage your credit globally, you need one global credit control area. Other possibilities include deriving the credit control area from the sales organization or the payer master record (billing tab).

This is an area where a wrong decision can damage the efficiency of your supply chain. For example, if you are dealing with global customers and credit control is at a local level, the myriad of local financial officials dealing with the same customer can create unwanted friction and loss of time. During the design phase it is vital to stress that the organization of credit control should follow the structure of your customer base as much as possible. Just opting for the company code level because it is logical from a financial point of view can actually damage your business.

Define credit control areas in customizing via menu path Enterprise structure>Definition>Define credit control area. Figure 2 shows the initial customizing screen.

Figure 2

Customize the credit control area

After you decide which level of credit control you want, you must determine how you define credit exposure by choosing the appropriate setting in the Update field in Figure 2. Defining the credit exposure is the key to your calculations in credit management. You have three options for the Update field, shown in Figure 3:

• 000012 starts with selecting the scheduled quantities in the sales order. As long as a sales order line is not scheduled, the value is not included. Then the logic follows the sales flow.

When you create a delivery, the open sales order value decreases and the open delivery value increases. When you bill a delivery to the customer, the open billing document value replaces the delivery value. When the system creates the financial document, it replaces the open billing document value automatically with the value of the accounts receivable open item.

This approach is based on the idea that a credit risk is created the moment you schedule a sales order item. This is valid if the time between scheduling and actual delivery is short. If scheduled lines sit in the system for a long time, this is not a good choice. In those cases it is better to place the risk at the start of the delivery process.

Including sales order value leads to an overabundance in credit blocks, which is undesirable from a supply chain point of view. It is important that those responsible on the financial side understand that this option means extra — and not always effective — work. If sales orders are included, but not valid because of long lead times, the responsible financial clerks must judge each case manually. This goes against the idea of efficient and effective credit control.

• 000015 has the same logic as 000012, but in this case the calculation starts when the system creates the delivery process. This definition of exposure is more to the point in cases in which sales orders are present in the system for a long time before any action is required.
  
  
• 000018 has the same logic as 000012, but credit exposure starts when the system creates the sales order. Also, the system does not consider the schedule line, which contains the details of the scheduled delivery to the customer. It can differ from the initial quantity in the related sales order line. In this case the order defines the risk. This method is suitable in an environment of fast-moving goods in which you execute sales orders right away. In all other situations, this calculation method can cause a loss in efficiency and make some figures difficult to interpret. Also, it is rare to find a case in which an unscheduled sales order really is a credit risk.

Figure 3

Select one of these options to define credit exposure

Set Up New Customers

Settings for new customers is another important aspect of the credit control area. In general it takes some time for a credit department to define a tailor-made credit limit, which can result in delays. Also, in business areas with large numbers of relatively anonymous customers, companies generally tend to avoid implementing specific limits.

In both scenarios, you need a default credit limit for new customers, since it is not possible (in the case of limit setup) or practical (in the case of large numbers of customers) to define single limits quickly enough. The settings for new customers allow you to define a default limit. You also can assign a default risk group. The risk group is one of the elements that define how the system reacts (see the first article in this series for more information). For example, you may treat a new internal customer or a key account differently than an unknown, small newcomer.

Finally, you can assign a new customer to a default credit representative group. This is an efficient way of linking all new customers to dedicated members of the credit department. In general it is not a good idea to put too low a value in the default credit limit if you are working with customers on a lengthy basis. At the start of the relationship, you do not want an overdose of red tape and the risk of late deliveries.

Assign the Credit Control Area

After you have finalized your settings, you must assign the credit control area to one or more company codes. The choice should depend on the level of credit management you want. If credit management is independent for each company code, you define and assign a separate area to each company code. However, if credit management is on a higher level, you can assign one area to a group of company codes.

Assign the credit control area via menu path Enterprise structure>Assignment>Assign company code to credit control area. Be careful not to assign company codes that were created for system reasons. For example, a financially irrelevant company code might be linked to a sales organization and the sales order could affect the credit exposure calculation. This could happen if you correct the company code for logistic reasons only. You can check if such a company is linked to a credit control area in the same screen.

The system offers three alternatives to derive the credit control area. No matter which option you choose, you must first assign the credit control area to provide a default value.

With the first alternative, derive the credit control area from the sales organization by following menu path Enterprise structure>assignment>sales and distribution>assign sales organization to credit control area. The advantage of this method is that the system deals with customers according to the way you set up your sales, rather then according to the financial organization of your company. By choosing this option, you also must assign the credit control area to the relevant company codes (default value).

For this method, it is vital to organize the credit department along similar lines. To ensure this, you must tackle two areas of possible dispute:

• Credit details for any customer (open items) are always registered on a company code level. If you assign a credit control area to a sales area, you must analyze customer positions for the relevant group of company codes. Also, the financial department needs to be aware of the mapping company code and sales area involved.
  
  
• Customers receive a monthly account statement detailing their Accounts Receivable positions with your company. Again, these statements are normally on a company code level, which complicates discussion about credit issues. It might be useful to discuss the possibility of using accounts statements that include all company codes concerned.

The second alternative is to derive the credit control area from the customer master (the payer’s Sales Area Billing Documents tab). The value assigned to a customer overwrites the default from the assignment credit control area and company code. This allows for flexibility in your credit control setup. For example, assuming that you have to define different payers for different distribution channels, this approach allows you to differentiate on that level. A word of caution, however: Do not go overboard on too detailed a setup. This complicates the process of document release and could hamper an efficient and effective process.

Finally, as a third alternative SAP provides user exit SAPFV45K_001 to derive the credit control area in a self-defined way if the opportunities provided do not cover your needs. If you want to use any of these possibilities keep in mind the proper sequence of derivation: user exit, customer (payer) master record, sales organization, and company code. The company code always supplies a default value.

Additional Tips

Now you can make detailed credit management settings in the credit management area via IMG menu path Financial Accounting>Accounts receivable>Credit management. I’m going to mention a few areas you might want to explore. Each of these is a subsequent level on this menu path on the IMG.

• Assign Permitted Credit Control Areas to Company Code. You can assign other credit control areas to a company code apart from the default one. After doing this, enter the alternative area in the financial document, as shown in Figure 4.

In my opinion, this process is very hard to control and nearly always leads to misunderstandings and unclear figures. If you need to exclude transactions, it is better to investigate the option of excluding specific reconciliation accounts from updating credit limits via IMG menu path Financial Accounting>Accounts receivable>Credit management>Business Transaction>Define Reconciliation Accts Without Credit Management Update.

• Define Credit Representative Groups and Define Reconciliation Accts Without Credit Management Update. In my opinion, the only important settings in this area of the IMG are the risk category and the credit representative group. The risk category is part of the key that defines all automatic credit checks (Figure 5). I explained in detail how this works in the first article in this series.

You can use the credit representative group to manage groups of customers and to link them to a specific member of the accounts receivable department. In some cases the credit representative is mentioned on an invoice, depending on the system setup. I advise you to use generic titles for these groups (e.g., credit representative key accounts) rather than personal names, so you don’t need to change it every time a different person is assigned to the task. Using credit representative groups can facilitate the communication between logistic and financial departments. For example, it is easy to remember that you need group A for key accounts. The alternative of phoning the credit department and finding out is more cumbersome.

Figure 4

In the Additional Details for Line Item level, you can add a different company code

Figure 5

Risk categories defined per credit control area (CCAr). The help text indicates the key role of the risk category in automatic credit control.

The remaining settings in the IMG are of no immediate concern and are fairly well documented. Those under Business transaction are mainly concerned with line layouts and the buckets used in reporting.