Get a high score in SAP credit management
By Clinton Jones on May 9, 2013
If you were to take a step back from your current operational role in finance, how easy would it be for you to sort through the static noise that clutters your average workday? Where are your real operational finance issues as they relate to systems and what do you use to be more effective in your job? if you’re responsible for the Accounts Receivable function in your business then you may be suffering everyday as you move from one crisis to another. Could some of these issues be addressed by addressing the mechanical tasks you’re doing and perhaps spending more time on understanding the fundamentals of good credit management?
A number of recent conversations with both Winshuttle customers and prospects suggest to me that there is more to solving business finance problems than flashy dashboards and the finalized and tidied up business reports that take account of the period(s) past. Many of these existing ERP customers in the finance space actually complain about a lack of agility in being able to make quick decisions and then have those decisions reflected in their system of record in a timely fashion.
Downgrade, re-grade or upgrade?
Decisions as simple as downgrading customer credit can be done in a routine and structured way in SAP using a combination of enterprise services, assessment reports and standard procedures in SAP. However, what if you run into exceptional circumstances and need to accelerate an activity and in effect perform credit downgrade or adjustment based on some exceptional event or turn in the market?
Your standard tools in SAP and the surrounding SAP eco-system support normal course activities and allow you to handle consistent, standardized processes but most businesses are still subject to the 80:20 rule. A simple 20% of your accounts consume 80% of your business activity and back office engagement.
There are only a few organizations that can hope to survive in the current economic climate without extending some form of trade credit. Deciding to extend credit to customers implies that you are prepared to accept some level of risk. In effect, you’re lending your customers money and as with all loans, there’s some risk in lending money. The two primary areas of risk are of course:
- bad debt
- failure to pay by the due date.
Bad debt is a total loss, unless you have an aggressive collections approach. Basically the goods or services you’ve provided are not going to be paid. Because of this risk, you’ll be making provisions for this and in accepting the risk, accept that some bad debt is likely to arise.
The second area of risk, the slow payer, is perceived as less of a problem. The issue here, is how long are you prepared to wait for settlement? This thinking about debt ignores the fact that slow payers erode profitability. 20% of your customers are likely slow payers and likely to be where the back office is spending a lot of time following up. Some of these slow payers will drip feed their settlement of accounts but some will make settlements in large bursts which make them appear to be ok debtors but often these accounts need rethinking.
Your SAP configuration and standardized reporting likely are based on a standardized credit rating approach, after all, All companies need standardized rules and regulations and should have, or use, some standardized form of Terms and Conditions of Sale. But do you have a clearly understood credit policy? Standardizing the Credit Policy and being able to apply it consistently is important as it provides consistent internal controls to ensure that selling and collecting on credit are handled efficiently, and in the best interests of the company.
Factors influencing your Credit Policy
Terms of Business – Do yours specify when and how you want to be paid? Are they clear; do they appear, for example, on your printed stationery or in the body of your sales orders? How does your customer know what their credit terms are?
Credit responsibility and authority – Who has the authority to give credit? How do you manage this and what do you do when you want to upgrade or downgrade credit? What are some of the triggering events? Who does collections and how do collections relate or understand the credit allowance process?
Knowledge – How do people in your organization become aware of the terms of business, how do they apply them to new customers or re-apply them to existing customers, what is your process for credit assessment, collection and legal collection. Do you even review overdue accounts in the sales organization?
Competition & the market – It’s safe to assume that many industry segments support a credit line model, but that’s not necessarily scientific evidence, how do you compare your business with your competitors? Do they offer better terms or any terms at all?
Cost – If your customers are regularly exceeding your credit terms, what is that actually costing your business in overdraft or financing fees, what are you spending on factoring out debt or paying a collections agency to follow up on defaulters. Costs of course include many other facets like the cost of sending collection letters, phone calls, commissions, legal fees etc.
Some fundamental principles to good credit management
Operationally you may also be using other tactics to minimize costs and risk, such as delayed shipment, taking deposits, deferred credit etc.
In the setting of credit limits, it is generally considered prudent to initially at least, set conservative credit limits for new customers and not be afraid of dealing on a payment in advance basis with new relationships. For example, if you want to do business with a new company but are unhappy about giving credit, a personal guarantee from the company’s executives to back up the commitment to pay offers some measure of comfort. The guarantee cans just a short letter and you could make this form based. Consider where you plan to put that letter of guarantee. Storing paper files is great if everyone is colocated or the filing is very methodical and easily accessible but these days that letter of guarantee probably came as a PDF from a fax machine anyway. Storing it along with the record creation or the request for record creation is probably the best approach to consider. Winshuttle’s forms and workflow platform could be of help even at this early stage in the customer setup stage.
Ensuring your internal processes conform to good business practice around evidence is of course essential. Customers or their agents should always be asked to sign for goods delivered and you should keep a copy of the delivery note. Without it, a straightforward collection of money owed can be difficult if there is a dispute. Issue invoices promptly on fulfillment of the order, whether it be for goods or services and then provide the courtesy of monthly statements and follow up phone calls for overdue accounts. When chasing overdue accounts, always obtain the name of the person responsible for Accounts Payable – ensure that your SAP records reflect and up to date set of records around this.
Streamlining the way you work with credit management
The great news is that even if you have considered all of these factors and feel you have a pretty tight ship in terms of credit management, the reality is that there are probably a number of activities that are still being undertaken in the back office that you could improve. Winshuttle’s business process optimization, usability improvement and automation platform has been successfully leveraged by many SAP customers to improve back office credit management activities for every SAP industry segment from wholesale distribution through utilities and local authorities.
SAP transaction FD32 for example allows you to maintain values like the credit limit and external and internal data relating to a customers’ credit management profile. Typically you would only work on this transaction if you needed to take some drastic action in response to a discovery on the sales side (such as recurrent order blocking due to credit limit issues) or if a customer credit review was ordered out of course. One of the challenges with using this transaction is that it is often not subject to workflow in SAP. You could enable it for SAP workflow but that would require some level of effort on configuring SAP workflow and then maintaining the solution there.
With Winshuttle’s platform, enabling FD32 for a workflow process is a process that can be rapidly implemented without programming and minimal effort. You would start with a recording of the transaction itself and then enable this recording for use with Winshuttle forms and workflow. The end result is that you could have multiple positions in your organization, review the change request for credit outside of SAP, with supplementary validations, prior to actually making any change in SAP. For organizations with a mobile sales force or a sales force that is largely offline from SAP this is a great way for keeping them informed on changes you’re making to a customer’s credit profile and at the same time having a way to track and trace who and why a customer’s credit profile may have been changed.
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The Winshuttle blog is written by professional thought leaders who are dedicated to providing content on a variety of topics, including industry news, best practices, software updates, continued education, tips and techniques, and much more.
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