OSS-Credit Mngt - Business View

8/2/2019 OSS-Credit Mngt - Business View

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SAP Credit ManagementBusiness View

ASM ERP, SAP AG



© SAP 2008 / Page 3

Reduce payment failure

by early detection of high risk customers (“early warning” function)

by taking action of the appropriate measures

Have a good assessment of the risk profile of your customer base

to advise sales where to focus on

to support SOX and Basel II regulations

Do not impede daily business

Monitor everything, but take action only when necessary

Emphasis on pro-active measures

Goals in Credit Management



© SAP 2008 / Page 4

Credit decisions for a business partner are taken often based on a local

(country / sales office) view

Available information is often not used / insufficiently used, for example

Sales representatives are not ask in a structured way to contribute their informationto the risk assessment of a business partner or their information is not stored in thecredit management system

External rating information of a business partner is not merged with internal data on

this business partner

No credit policy in place to describe internal processes and procedures

No standardized unbiased credit worthiness evaluation of business partners

No customer credit scorecard developed to assess credit worthiness of a

business partner in a well defined way

No segmentation of customer base according to risk criteria

Therefore insufficient portfolio control

Insufficient early warning mechanisms

Credit Management – Internal Factors



© SAP 2008 / Page 5

Year 2005: ca. 147.200 corporate bankruptcies in the European Union*

Average delay in payments for Western Europe between 8 days and 21 days*

At many companies the total of supplier credits often surpass substantially thetotal short / midterm loans provided by banks

Companies use their suppliers as “bank”, Basel II regulations will foster this “easy

credit” as banks rise their loan standards

But no adequate securities provided

Credit Management – External Factors

* Source: Creditreform



© SAP 2008 / Page 6

Develop and implement a credit policy

Define and test customer credit score cards

Define a risk class system to segment your customer portfolio

Define credit limits and credit worthiness check rules

Apply credit policy, scorecards, risk class segmentation and credit worthinesschecks in a real-time & automated manner for all relevant businesstransactions

Set up early warning mechanisms to allow pro-active credit management

Set up monitoring mechanism to allow portfolio control of your customer base

according to risk criteria

How to come to a state-of-the-art Credit

Management?



© SAP 2008 / Page 7

The credit policy contains:

The goals of the credit policy: For example: early warning of credit failure risk, reduction of DSO, simplification of

credit worthiness check processes,...

Organizational guidelines Functions: who makes what where and how?

Who is allowed to do what? Internal escalations

Operational procedures and processes Credit Worthiness Checks: under what conditions, when and where?

How do we come to a credit decision? Scoring, risk classification, credit limit allocation

Possible implication for payment and dunning terms Documentation of credit decision

Definition of credit monitoring and reporting Time intervals for revisions and adjustments of scoring, limit,…

Scope of reporting, target group

1. Develop and implement a credit policy


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Customer credit score card:

The customer credit score card shall determine the probability of the creditfailure risk of a customer

It should consist of decisive and stable indicators

External and internal data, customer specific, industry specific

The validity of the score card has to be tested with historical data using statistical

methods The validity should be monitored continuously

Particular score cards might be needed for particular customer segments

2. Define a and test a customer credit score

card

Company age 10%

Payment behavior 25%

Industry sector 10%

External credit information 25%

Number of employees 10%

Financial statement key figures 10%

Assessment from sales 10%

Score Value xxx



Risk class system:

Allocate your customers to risk classes based on their score values

Rule of thumb: Define 8-12 risk classes

Assign the probability of credit failure risk to each risk class

Get a clear view regarding the risk in your customer portfolio

SOX and Basel II regulations require this ability

Define appropriate measures & terms in sales, account receivables, collectionsfor each customer depending on his risk class

3. Define a risk class system

Score Value Risk class

0-88 A

89-129 B

130-169 C

…



Credit Limits and Check Rules:

The single credit limit assigned to a specific customer may depend on His credit risk score

His order behavior (patterns, intervals, seasonal variations ) & average order value

His payment terms

His ability to fulfill debt service

Consider legal structure of customers (ex.: branch office / head officestructures

Several credit limits may be assigned to a single customer (global limit, limitper each of your sales division)

Besides of an exceeded credit limit other criteria should lead to a failed creditworthiness check

Criteria which can be used as an early warning indicator for increased credit risk Examples: Dunning level reached, single document value, age of oldest open item,

…

4. Define Credit Limits and Check Rules



Real-time and a high degree of automation:

Strategies, policies & procedures are fine, but acting accordingly in day to day businessis key to success

Automatic credit worthiness checks when entering customer orders, preparingdeliveries,…

Immediate feedback to user (possibility to interact with customer)

Corresponding status handling of business documents

Support of automated exception based work flows as defined in credit policy (for example:approval procedures)

Know always the actual credit exposure of a particular customer

It‟s one customer: across corporate entities, countries,…

Ongoing real time scoring of customers according to score card rules

for example triggered by new external credit information

Immediate adoption of risk class assignment & credit limits if necessary

Traceability of everything

Automated transactions (why did credit limit check of order „123‟ fail?)

Manual interaction (who applied for this credit limit, who approved it?)

5. Apply everything in a real-time & automated

manner



Proactive Credit Management:

Checking customer orders to avoid risk if fine, a proactive & preventiveapproach is even better, because

Blocking a customer order always disrupts the business process

Approval decisions for blocked orders might have to be made under time pressure

Relationship to customer might be strained

Identify customers which utilize their credit limit to a certain extent and takeaction

Intensify cash collection

Verify payment terms

Check with sales and a risk assessment to find out if a higher credit limit is

appropriate

6. Proactive Credit Management



Control you Customer Portfolio:

You have maximum transparency regarding the structural risk of your customerportfolio

Try to optimize your portfolio under risk aspects

Identify customers groups with which you would like to intensify business with

Develop strategies how to develop business relationship with different groups

Align with sales and marketing

7. Control your Customer Portfolio



State-of-the-art Credit Management

How can SAP help you to implement a

state-of-the-art

Credit Management?



Your Credit Policy in SAP Credit Management

SAP Credit Management

SAP User concept

SAP Authorization concept

Flexible organizational structure in SAP CreditManagement

Workflows for credit limit applications, external ratingchanged, score change, credit limit change, credit

worthiness check failed, credit exposure above 100%

Support of multi control approach (ex.: limit changes)

Event driven updates for scoring recalculation, risk classassignment and credit limits recalculation

Scheduled mass updates for external rating import, scoringrecalculation, credit limit recalculation

Last but not least: SAP Enterprise Portal to maintain &publish credit policy documents

Credit Policy

Goals

Organizational Guidelines

Procedures & Processes

Monitoring and Reporting




Access to internal data (from sales, accounts receivable,…)for scoring

Real-time XML based access to external data frominformation providers

Flexible definition of scoring formulas in SAP CreditManagement

Business partner specific assignment of scoring formulas

Score Value Risk class

0-88 A

89-129 B

130-169 C

…

Your Credit Score Cards in SAP Credit

Management

Score CardCustomer specific dataExternal and internaldataDifferent score cards fordifferent customersegments



Your risk class system in SAP Credit

Management


Risk classes can be assigned automatically to abusiness partner derived from his score value

Risk class changes (triggered themselves for exampleby a recalculated scoring) can trigger a workflow toenable subsequent activities

Reports allow selection / sorting of customers by riskclass

Risk class assignment of a business partner is takeninto account in SAP Collection Management whengenerating the collection work list

Risk class segmentation

Allocate customers to risk classes

Clear view regarding the risk inyour customer portfolio

Appropriate measures & terms insales, account receivables,collections for each customerdepending on his risk class



Your Credit Limits & Check Rules in SAP

Credit Management


Flexible credit limit calculation rules

Access to all relevant data for credit limit calculation

Manual setting of credit limits with approval workflows

Tree structures of business partners with different limitsfor each entity / level can be set up

Several credit limits according to your organizationalstructure (modeled as credit segments)

Additional checks possible (ex.: dunning level, oldestopen item, payment behavior index)

Credit Limits & Check Rules

Calculation rules for creditlimits

Consider legal structure ofcustomers

Global & local credit limits

Additional checks besides of

limit



Real-time processing & integration in SAP

Credit Management


Credit limits checks carried out when entering orders,deliveries, good issues*

Every system can be connected to SAP* CreditManagement

Immediate exposure updates*

Integration with Accounts Receivable*

Exposure Payment Behavior key figures

Recalculation of scoring event driven

Change documents, various logs, …

Processing & Integration

Automatic credit worthinesschecks

Up-to-date credit exposure ofa particular customer

Ongoing real time scoring ofcustomers

Traceability

O p e r a t i o n a l

S y s t e m s

CRM ERP A ERP B

E x t e r n a l

I n f o r m a t i o n

P r o v i d e r

Provider 1 Provider 2

*Integration via ESA Services



Proactive Credit Management in SAP Credit

Management

SAP Credit Management Early warning lists identify customers who approach

their credit limit

Automatic workflows can be triggered when certainevents occur at a customer, e.g.: Limit reduced due to automatic limit recalculation

Exposure reaches x% from credit limit

SAP Collections Management can take into accountcredit exposure / credit limit ratio in collection strategies

Proactive Credit Management

Identify critical customers

Take appropriate action



Control your Customer Portfolio with SAP

Credit Management


Analytical reports show portfolio view of customers Segmentation by risk class

Segmentation by country

Total customer exposure / credit limit usage by risk class

Share portfolio data through SAP Enterprise Portal

Portfolio Control

Transparency of customer portfolio

Optimize your risk portfolio

Align with sales & marketing



SAP Credit Management in a nutshell

SAP Credit Management offers…

Flexible scoring

Powerful process automation

Easy integration with operational systems (sales, order tacking, finance)

Real time integration with external information providers

Comprehensive analytics & reporting

… to help you to achieve efficiently and effectively your creditmanagement goals!



Thank you!



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OSS-Credit Mngt - Business View