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 customer’s 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 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 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 customer’s total receivables ( Value of Order A + Order B ) along with his current order ( Order C ) is checked against this limit. Since the customer exceeds the 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. In reality, it can get pretty complicated and not all the scenarios will be covered in this document.
Types of credit checks in SAP:
1. Simple check
2. Dynamic check
a. Static Check
b. Dynamic Check
Simple Check
This is very similar to the example we have discussed earlier. Simple credit check compares the Customer’s credit limit to the total of all the items in the order and the value of all open items.
Credit Exposure in Simple 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 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 exposure exceeds the 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 Open Deliveries + Open Invoices + Open Items + Open Orders
Dynamic Check Open Deliveries + Open Invoices + Open Items + Open Sales Order Value with a Time period ( Called Time Horizon )
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 check, the 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 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 check.
When you’re struggling with debt and looking for profession help, you have
four options: credit counseling, debt negotiation, debt management, or debt
consolidation. While credit counseling and debt consolidation are both pretty
straightforward services, many people have trouble understanding the difference
between debt negotiation and debt management. This article compares the two
services, and it will help you to determine which service is right for you.
First, ask yourself these questions:
Does My Problem Stem From An Inability To Afford My Debt Payments?
If you answered yes to this question, debt negotiation is probably the choice
for you. Debt negotiation services call your creditors on your behalf and
negotiate lower payments. You keep control of sending out your payments each
month, but your debt negotiation company will negotiate payments with your
creditors that you can afford. Additionally, if your reasons for being unable to
afford your debt payments stem from a circumstance that is not beyond your
control, credit counseling is usually available.
Does My Problem Stem From An Inability To Both Afford and Manage My Debt
Payments?
If you answered yes to this question, then you’re probably in need of the
services of a debt management company. In addition to negotiating lower payments
with your creditors, debt management companies will distribute your payments to
your creditors on your behalf. You simply send them one combined monthly
payment. If you have trouble remembering to pay your bills on time every month,
your credit will greatly benefit from the services of a company that ensures
timely payments.
Debt management differs from debt consolidation in that debt consolidation is a
loan that consolidates all of your debts, and debt management is just a service
that calculates the balance of all of your payments and combines them for you.
With debt management, you still hold all of your original credit accounts.
The most important part of seeking professional debt services is getting
counseling in order to prevent future debt problems. Any professional debt
service should also provide counseling in order to teach you how to stay out of
debt once their services have ceased. Debt services are not meant to be a way
for you to escape your financial responsibilities; rather, they are a way for
you to educate yourself on responsible handling of your credit and debt.