oss-credit mngt - business view
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SAP Credit ManagementBusiness View
ASM ERP, SAP AG
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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
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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
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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
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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?
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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
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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
…
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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
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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
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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
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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
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State-of-the-art Credit Management
How can SAP help you to implement a
state-of-the-art
Credit Management?
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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
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SAP Credit Management
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
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Your risk class system in SAP Credit
Management
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
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Your Credit Limits & Check Rules in SAP
Credit Management
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
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Real-time processing & integration in SAP
Credit Management
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
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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
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Control your Customer Portfolio with SAP
Credit Management
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
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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!
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Thank you!
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