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Author's profile photo Nishi Parikh

Trade Finance Configuration – SAP Treasury Management

Introduction

Through a variety of products that assist clients in managing international payments and the risks associated with them, as well as by providing the necessary working capital, global and local banks support international trade. Most of the time, banking products that are specifically connected to the underlying international trade transaction (export or import) are referred to as “trade finance”. This definition generally excludes working capital loans that are not specifically related to trading. Instruments for trade finance typically involve capital but typically have short maturities.

A letter of credit (L/C) is one of the most typical and standardized forms of trade finance that is facilitated by banks. By providing a framework under which a bank makes (or guarantees) the payment to an exporter on behalf of an importer once the delivery of goods has been confirmed through the presentation of the appropriate documents, L/Cs reduce payment.

There are two product type given by SAP for trade finance :

  1. 850 – Letter of Credit
  2. 860 – Bank Guarantee

Here we will see configuration process of Letter of Credit. The configuration is same for both product  Bank guarantee and Letter of credit

 

Defining Product type

First step is by Defining product type by giving  entering  name and unique product type to recognize which it belongs to.

PATH

SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Define product type

 

After clicking on define product type click on new entries. to create product type.

Enter Product category 850  for letter of credit and 860 for bank guarantee. Enter long and short text.

 

 Defining Transaction Types

Define type of transaction as issue or receive in product type as per client requirement.

PATH

SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Transaction type

First step create number range for each transaction type

 

  • Create Number Range

After creating number range, define transaction type in each product type.

  • Transaction types

Enter Product type and transaction type. Assign number range to each transaction type.

 

Define flow type

 

Payment flows like principal increase, final repayment, and nominal interest are all defined by flow types .For the purpose of analysis, flow types are integrated with FI and cash management.
Along with the Product type, flow types must be assigned to specific transaction types.

 

PATH

SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Flow Types – Define Flow types – Trade Finance Transaction

 

Create below flow type :

Defining below Flow types for transaction in Trade Finance area:

Flow type Description
10 Principal Increase
11 Principal Decrease
84 Payment Obligation
85 Trade Finance payment
86 Remaining credit amount
90 Other flow condition
91 Collateral

Assign flow type

In previous steps we created Product type and transaction type. now assign the created flow type to product type and transaction type.

PATH

SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Flow Types – Assign flow type to transaction type -Trade Finance Transaction

 

 Define update type and assign usage 

We need to create as many update type as flow type created with +/- sign

PATH

SPRO – Financial Supply chain management – Treasury and risk management – Transaction management – product type – Flow Types – Define Flow types – Define update type and Assign Usage

Create update type for every flow type previously created.

Now Assign Update Type to Usage.

Assign Flow type to Update type

Now , we assign all flow type previously created to respective update type.

PATH

SPRO – Financial Supply chain management- Treasury and risk management – Transaction management – product type – Update type – Assign flow type to update type

 

Assign Flow type inflow (+) and outflow (-) in flow type.

 

Assign General valuation

You can create valuation class as per client requirement as per product type.

PATH

SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Assign General Valuation

 

Payment condition

Now we will configure payment condition. There are two condition Presentation period and payment. Presentation condition is based on shipping date and Payment condition is based on own enter date by user.

PATH

SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – Define condition for payment and presentation period

 

 

Enter both condition by clicking on new entries.

Accounting  

Now we need to specify which update type is virtual and which will post accounting entry. It depends on business requirement it differ to every case scenario.

 

PATH

SPRO – financial supply chain management – Treasury and Risk management – General Settings – Accounting – Link to Other Accounting component – Indicate update type as relevant to posting

 

Only click on update type which are relevant to posting.

In next step ,we will assign Posting Specs to update type and Account Determination to those who are relevant to posting.

Enter Relevant General Ledger account to posting specs.

 

Conclusion:

SAP provided special feature for both letter of credit and bank guarantee product type and the transaction are fully automated.

 

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