Better Control of Risks

Feature Article | January 13, 2004 by admin

SAP is developing new applications for account and credit management as part of Financial Supply Chain Management (FSCM). SAP Credit Management is a part of this comprehensive FSCM solution and will be delivered in mid-2004. SAP Credit Management supports companies in their attempt to recognize the risk of account shortfalls from customers and to handle credit decisions efficiently and as automatically as possible.

Credit Limit Management & Control

The Architecture of SAP Credit Management

The Architecture of SAP Credit Management

Within SAP Credit Management, the functions of Credit Limit Management & Control (CLM) will manage all a business partner’s master data that relates to credit. The data includes the current credit limit, one or more externally calculated values on creditworthiness (by credit-reporting agencies, for example), the risk class assigned to a company, and an order limit. Each field of the master data also has a change history that displays the time of the change, the person who made the change, and the new and old values. The application also has a note function that the credit manager can use to record additional information on a business partner. The solution can also include document storage to keep track of press clippings, correspondence, and bank or rating information.

SAP Credit Management offers additional functions to monitor the total liabilities of a customer. To check a credit limit, these functions can be called over an interface from SAP solutions and non-SAP systems. As a result, users can calculate the total liabilities of a business partner, including all accounts payable and payment obligations, and do so from various systems. Accordingly, the credit manager can check this calculation against the credit limit stored in the master data on credit. Users can select between two types of checks on credit limits: synchronous or asynchronous.

  • With a synchronous check of the credit limit, monitoring occurs immediately upon creation of the liability. In doing so, the application (a CRM system, for example), transfers information on the business partner and its liability (a sales order, for example) to SAP Credit Management. In parallel, SAP Credit Management calculates the customer’s total liabilities, checks this figure against the stored credit limit, and returns the result of the check to the original application. The application can then use the result of the check to direct further processing of the liability. For example, it might block the sales order.
  • With an asynchronous checking of the credit limit, the actual check occurs later, at the end of a period (once a day, for example) as part of a scheduled batch run. In doing so, all the previously collected liability notifications and incoming payments are consolidated, checked against the credit limit, and output as a report. The credit manager can evaluate the reports and decide upon the required actions. This approach is primarily helpful when the check cannot be called directly from the previous system, either because it’s unavailable or because these types of queries would have a negative affect on performance.

Regardless of the form that checking the credit limit takes, SAP Credit Management can determine the liability values both actively and passively. In the active case, another system, such as an invoicing system, provides SAP Credit Management with data on the liability. SAP Credit Management can also actively query the liability from the previous system. With this approach, the most up-to-date order, delivery, and account balances can be drawn from the previous systems and made available to the check of the credit limit.
Within SAP Credit Management, setting and monitoring a credit limit are related to individual business partners. But because of the increasing integration of companies, SAP Credit Management can also determine the total liabilities of a customer as the sum of the liabilities of linked companies. Depending upon the risk class, credit-monitoring areas (credit segment), and customer group, users can include various criteria to monitor the limit of a business partner. The criteria can include seasonal adjustments of the credit limit (increases or reductions by percentage), data on the current business partners (open items, the oldest dunning item, and the maximum dunning level), the percentage of overdue items in the total of open items, and the number or total of returns.
To determine the net exposure of a company, SAP Credit Management also offers an option to include the collateral posted by a customer to satisfy liabilities (such as bank guarantees) in the calculation of the company’s overall liability.

Credit Information

The credit information function supports credit managers in determining and managing the external and internal credit information on a customer. This information primarily serves as input parameters for the Credit Rules Engine (described in more detail below), which can be used to make credit decisions or calculate credit limits automatically.
SAP Credit Management offers complete integration of queries of external credit information and enables users to gather information electronically over XML interfaces. Because credit departments often user several external credit agencies, SAP Credit Management can store the information transmitted by such an interface according to the specific data provider. This capability allows users to compare results and process them separately. Users can later employ a query history to trace the creditworthiness of a customer. The XML interface is designed for information on business and private customers.
In addition to external credit data, internally managed company data on business partners can be extracted from other systems and used with company-specific rating rules to determine internal values for creditworthiness. For example, internal values for creditworthiness can be derived from the following data:

  • Nationality of the business partner
  • Average payment delay in days
  • Number of dunning letters in the last 12 months
  • Average dunning level

The external and internal credit information that has been determined is stored in the master data of the business partner. Data on creditworthiness can be updated manually or automatically. In the latter case, a batch program periodically checks the validity date of the data and generates a new value for creditworthiness in the event of overdue payments.

Credit Rules Engine

SAP Credit Management offers an option to use rules to automate specific processes in credit management. The Credit Rules Engine manages the following processes:

  • Scoring the Creditworthiness of Business Partners – The calculation of values for creditworthiness is a complex procedure that can be simplified by using the Credit Rules Engine. Users can assign an individual customer a procedure that stores a formula for calculating the customer’s creditworthiness. Users can define any formula they wish and have access to several sources of data as input parameters. SAP Credit Management has batch processing functions that enable users to recalculate the creditworthiness of a large number of customers or to change the calculation procedure.
  • Determining the Credit Limit – The Credit Rules Engine also offers an option to calculate the credit limit for customers automatically. Here too, users can access numerous sources of internal and external data that can be employed as input parameters for the formula. Once it has been calculated in this manner, the credit limit can be used as a proposed value or even be transferred as a fixed and unchangeable system default into the customer’s master data. SAP Workflow can be used to implement a procedure to have the credit manager’s superior check and approve changes to the credit limit.
  • Rules for Checking a Credit Limit – In the Credit Rules Engine, users can store rules for checking the credit limit of orders. Users can decide if additional checks should occur in addition to the actual check on the utilization of the credit limit. The additional checks can include the age of open items or the maximum number of dunning letters for a given customer. If needed, users can also determine the effects that a negative result should have, such as blocking a sales order, locking the customer’s account, or triggering a workflow.

Credit Decision Support

To make quick and efficient decisions on blocked orders or the credit limit, credit managers require information from various systems. Within SAP Credit Management, Credit Decision Support helps users determine the required data and analyses related to a customer, which are summarized by customer in a customer credit fact sheet. Credit Decision Support includes reports on the following:

  • Analysis of a customer’s credit history, such as utilization of the credit limit, development of creditworthiness, external ratings from credit agencies, and blocked sales orders
  • Analysis of payment behavior, such as average number of late days for payments, the due-date structure of open items, number of dunning letters, oldest open item, and days that sales are outstanding
  • Analysis of ordering behavior, such as the average volume of orders, highest and lowest value of orders, refused orders, blocked orders, cancelled orders, number of customer complaints

Additional information on FSCM and the components described here is available at http://www.sap.com/FSCM or from SAP Service Marketplace (alias: FSCM).

Jürgen Weiss

Jürgen Weiss

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