Configure and Customize SAP Automatic Credit Management
Credit management is the management of credit facility granted to customers as credit exposure allowed. Credit facility 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 (Credit Exposure) granted changes. For some customers, the risk perceived may be high such that we may demand payment in advance.
This credit management comes partially under preview of Sales and Distribution (SD) and partially of Account Receivables (AR).
Key challenge: Reducing credit risk without hampering the supply chain.
Dealing with Bad Debt: Before getting involved, ask yourself:
- How do I react to a bad debt?
- Do I block orders from important customers, or do I grab a phone?
- What is the volume of blocked orders my F&A department can handle?
- Can I afford to block customers (small customer base)?
- What do I save?
- What is the cost in terms of damage?
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 to specify the points at which they have to be carried out
Automatically alert the credit representative of 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.
Every customer is having a certain credit limit, which is measured and maintained by Finance people. Credit check is done for each and every order/SD documents generated.
Credit check is performed at the following stages of Sales order cycle, Credit check settings present in each SD document is responsible for interacting with FI module.
Figure 1:Stages of Credit Check
Define Risk Category
SPRO > Financial Accounting > Account Receivable and Accounts Payable > Credit Management > Credit Control Account > Define Risk Categories
Figure 2:Define Risk Category
Define Credit Control Area
SPRO > Enterprise Structure > Definition > Financial Accounting > Define Credit Control Area
Figure 3:Define Credit Control Area
Figure 4:Define Credit Control Area – Details
The type of update chosen controls when the values of open sales orders, deliveries and billing documents are updated depending upon the type of document being generated. One of the following update groups can be chosen as available in standard SAP
- Blank – If the field is left blank, the SD documents are ignored and only open receivables and open special G/L items are used for calculating credit exposure.
- 000012 – When a new order is created, the open order value is added to the credit exposure. When the order is delivered, the open order value is subtracted and the open delivery value added to the exposure. On billing the delivery, open delivery value is subtracted and the open billing value is added to the exposure. When billing posts to accounting, the open billing value is subtracted and the open A/R value added to the exposure. The exposure is finally reduced when the cash is applied against open A/R.
- 000015 – Calculates exposure without considering open sales order value. When the order is delivered, the open delivery value is added to exposure. On billing the delivery, open delivery value is subtracted and the open billing value is added to the exposure. When billing posts to accounting, the open billing value is subtracted and the open A/R value added to the exposure. The exposure is finally reduced when the cash is applied against open A/R.
- 00018 – This is relevant for non-delivery-relevant orders only. When a new order is created, the open delivery value is added to the credit exposure. When the order is billed, the open delivery value is subtracted and the open billing added to the exposure. When billing posts to accounting, the open billing value is subtracted and the open A/R value added to the exposure. The exposure is finally reduced when the cash is applied against open A/R.
Note: SAP recommends the use of update group 000012
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 separately for each company code. This method delivers benefits such as the local payment cultures can be respected, each company code has the independence to make its own decisions.
- 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. Centralized credit management has benefits such as easier analysis of credit policy and modifications required, the focus is shifted to other important areas such as bad debt reductions and improved customer relations as there is only a central credit team that needs to be consulted irrespective of the geography etc.
Figure 5: Organisational Unit in Credit Management
Assigning Company Codes to a Credit Control Area
SPRO > Enterprise Structure > Assignment > Financial Accounting > Assign Company Code to Credit Control Area
Figure 6: Company Codes to Credit Control Area
Assigning Sales Area to a Credit Control Area
SPRO > Enterprise Structure > Assignment > Sales and Distribution > Assign Sales Area to Credit Control Area
Figure 7: Sales Area to Credit Control Area
Define Credit Groups
SPRO > Sales & Distribution > Basic Functions > Credit Management and Risk Management > Credit Management > Define Credit Groups.
The credit group specifies which subsequent transaction can be blocked for processing, if the credit limits are exceeded.You can use the default credit groups or create new once.
Figure 8: Define Credit Groups
Assigning Sales Documents and Delivery Documents to Credit Group
SPRO > Sales and Distribution > Basic Functions > Credit Management/Risk Management > Credit Management > Assign Sales Documents and Delivery Documents > Credit Limit Check for Order Types > Credit Limit Check for Delivery Types
Figure 9: Credit Limit Check for Order Type
Figure 10: Credit Limit check for Delivery Type
Simple Credit Check Vs Automatic Credit Check
- High-volume, low-value requires automation and efficient handling through grouping, with as little personal handling as possible (refuse orders as much as possible)
- Low-volume, high-value requires individualization with emphasis on reporting and blocked orders or deliveries that can be checked and unblocked.
Figure 11: Simple Credit Check Vs Automatic Credit Check
Simple Credit Check
The simple credit check compares the payer customer master record’s credit limit to the net document value plus the value of all open items.
In case the value of the document and open items is more than the credit limit:
- System may respond with a warning message in the sales order [OR]
- Warning message and a delivery block [OR]
- Error message, which will cause the document not to be saved.
Automatic Credit Check Variations & Recommended Use
Automatic Credit Check – Gives extra parameters to define credit checks like Credit Control Area, Risk Category and…
Figure 12: Automatic Credit Check Maintenance
STATIC CREDIT LIMIT DETERMINATION:
- Open Sales Orders + Sales Order Value
- Open Delivery
- Open Billing
- Open Receivables
Recommended Use: This is seen to be safer to use as compared to Dynamic Credit Check as it covers all documents due to varying business needs. For high volume and very low risk customers (e.g. Risk Category 001), it is good practice to put deliveries on block and leave the orders untouched. This prevents a level of check.
DYNAMIC CREDIT CHECK:
1) 2) 3) 4) Above Mentioned
5) Horizon Period : Eg. 3 Months.
Here the System will not consider the Open items 1, 2, 3 & 4 values for beyond 3 months.
Recommended Use: If the business is always likely to have fast moving items leaving no chances of Open Orders, Open Deliveries etc for long time period, this is good to use. There can be other business considerations to include only Open items within certain period
Maximum Document Value
The sales order or delivery value may not exceed a specific value which is defined in the credit check. The value is stored in the currency of the credit control area. This check is useful if the credit limit has not yet been defined for a new customer. It is initiated by a risk category which is defined specifically for new customers.
Recommended Use: Use it for Credit Group 01 (Orders) and high risk category customers which you always want to review beyond a particular value. It may also be used for prepaid or one-time customer with Max doc value.
This Credit check is initiated by document changes done in credit sensitive fields. One such example is terms of payment. When this field changes, a check is done on the data in sales order against the data in the customer master.
Date of Next Review
System uses the date of the next credit review as a trigger for an automatic credit check. If you process a sales order after a customer’s next review date has already gone by, the system automatically carries out a credit check.
Overdue Open Items
The relation between open items which are more than a certain number of days overdue and the customer balance may not exceed a certain percentage. These values are defined in the customizing for automatic credit control.
Recommended Use: Use it for Credit Group 01 (Orders) in conjunction with Static Credit Check for slightly higher risk category customers, where you don’t want to have more than a certain % of open items. The values may be reduced with increase in risk category values.
Oldest Open Item
The oldest open item may not be more than a specified number of days overdue.
Recommended Use: Use it for any Credit Group 01 or 02 (Orders or deliveries) in conjunction with Static Credit Check for slightly Low-Medium risk category customers.
Maximum Number of Dunning Levels Allowed
The customer’s dunning level may only reach a specified maximum value exceeding which the item may be blocked if so configured.
User-Defined Checks- For e.g. Cheque received from a customer bounced, then subsequent orders may get blocked.
Credit Management at work
For each customer, credit limits are specified in the particular credit master record. If the customer exists in multiple credit control areas, individual limit can be specified 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.
FD32 (FI T code) is used to set credit limit and credit risk category for the customer.
Figure 13: Credit Limit for Customer
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 of 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.
Figure 14: Overview Screen
Central Data Screen
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
Figure 15: Central Data Screen
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
Figure 16: Status Screen
Credit Check at work in Sales Order creation
When sales order is created (SD), system verifies the credit limit used by the customer by communicating with values set in FD32 (FI)
Figure 17: Credit Check
Release Sales Documents from Credit Block
Block will be released if the Agent discussed with Customer and / or payment is received from Customer. VKM1, VKM3 and VKM5 are key T codes used to release Sales and Delivery documents from Credit Block. 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.
Figure 18: Release Credit Block
- RFDKLI10 – Customers with missing credit data
- RFDKLI20 – Reorganization of credit limit for customers in credit control areas
- RFDKLI30 – Central and credit control area related data for customer (short overview)
- RFDKLI40 – Overview credit limit (extensive)
- RFDKLI41 – Credit master sheet
- RFDKLI42 – Early warning list
- RFDKLI43 – Master data list especially for printing customer cards along with data from external systems
- RFDKLI50 – Mass change for master data in credit management
- RFDKLIAB – Display changes for credit management data
- RVKRED06- Checking blocked credit documents
- RVKRED08 – Checking sales documents which reach the dynamic credit check horizon (periodic report)
- RVKRED09 – Checking the credit documents from credit view (released documents are checked only if the validity period for the release is up)
- RVKRED77 – Reorganization of open credit, delivery and billing document values especially when update errors occur
- RVKRED88 – Simulation reorganization credit data SD
Thanks for your knowledge sharing. It is too useful for me.
Very thorough and well researched Sandeep.
Good job here!
This is really helpful Sandeep.Thanks for sharing
Nice document.. thanks for detail explanation !!
Nice explanation and it is really helpful.
Thanks for sharing your knowledge and keep sharing.
I would like to ask more about dynamic credit check. If I set at 3 options as follow:
- Document value
- Open items
1. How the system work? SAP will check from Dynamic -> Document value -> Open items or Open items -> Document value -> Dynamic?
2. After SAP have checked and display credit blocked message. If system found credit blocked from 'Document value' and 'Open items' , How SAP display credit blocked message? Message come from 'Document value' or 'Open items'?
Thank you in advance,
Thanks Sandeep. This is a ready reference document for credit management 🙂
A comprehensive blog on Credit Management. Good work done.
Sir---in document" Configure and Customize SAP Automatic Credit Management".---please correct the flaw as mentioned in my comment--thereby the people who follows this ,will get correct information..
I dont know why moderator approved this again even after my alert...
Thanks for share this info.
Very useful 🙂 .
Regards Antonio Martinez
Good work--i appreciate being an FI guy your presentation including SD is very nice...
Sorry to tell you that there a mistake in your document while sharing about dynamic credit check about Horizon period.
as per you--
"""""5) Horizon Period : Eg. 3 Months.
Here the System will not consider the Open items 1, 2, 3 & 4 values for beyond 3 months""""
No--- here-actually system will divides this 1,2,3,4 as two parts---2,3,4 will be fixed called as static part and the the first option 1 will be called as dynamic part(open sales orders)
(2,3,4 will be taken in credit calculations if lying beyond 3 months)
the only difference is whether open sales order(with confirmed delivery schedule lines)--has to be considered in credit calculations or not(if lies in these 3 months--then this open sales order value will be added in credit calculations--otherwise no)
See F1 at dynamic credit check in OVA8--you will get more clarity.
Please change this flaw in your presentation--once after confirming...
Good document thank you for sharing knowledge.
Please check Phanikumar V comments, retest the scenario and change your blog if necessary.
In our client we are running daily - RVKRED09)
Do we need to run the below two program also? because sometime, the orders are keep on going to block.
RVKRED06- Checking blocked credit documents
RVKRED08 – Checking sales documents which reach the dynamic credit check horizon
It would be appreciated if you provide your suggestions. Thanks
Many thanks for sharing valuable document....
Very helpful document..thanks for posting
Thanks for the document, very usefull, during an Audit review with a client i came accross with the next question:
Reviewing this process with a client I verified that when the Customer excided the credit limit assigned in SAP, the system automatically blocked the purchase requisition. In order to release it the Credit, the Clerk needed the Management authorization and this was done manually and outside SAP. Once she had the authorization sheet signed the clerk manually released the PR.
I wonder if it is possible to configure a SAP work flow in order to release credit block as when the control is manually performed it could be easily override.
Thanks in advance
Nice doc of great value. Good job.
First of all, thanks for your effort in preparing the document.
But one clarification in this, For Dynamic Credit Check, the horizon period is only for the Open Sales Orders and not for all Items.
Thanks for your comments. Very good post.
I'm working as a Credit Manager and I need to have several Sold To's (Same VAT code), but different payment conditions and different Credit Limits.
How can I do that setting in FD32 Screen?
I'm wondering if anyone is having the same issue I have.
We have the full credit up and running, I released from the credit perspective a Sales Document with VKM3, but the Business Unit keeps working on the order and the Hold is triggered automatically again. So they have to come to us and request a credit release again; (eventhough it was approved already).
Is there anyway I can configure the Sales Order to avoid going back on hold after it has been released for the first time?
I'll wait for your comments
This documents is very useful spaciously for new is SAP , I just started my career as SAP Consultant . this will be like mind blowing information about credit management .
Nice document, well explained thank you.
At the same time a good synthesis and straightforward, ty