Suppose the company is providing a product regularly to a wholesale customer. Customer has been ordering materials monthly and normally pays invoices as agreed. One day a customer orders again, but the company’s system is not able to process the sales order as usual.
What could be the reason?
The customer may have already taken up a lot of the credit limit the company has granted the customer. The organisation should determine if the customer is able to make additional payments, or they will continue to be a burden on the company.
This is a crucial sales operation situation. Businesses desire to have a good relationship with customers, but they also require to manage outstanding payments. Businesses can deal with this process with the help of SAP Sales and Distribution (SAP SD) with the help of credit checks and sales order controls.
If you are pursuing SAP SD Training in Chennai, you will be interested in knowing how the credit management works for Customers.
For what reason do Companies put limits on customers credit?
Not all customers pay up front once they have received products. In many businesses, customers can buy products and pay for them on deferred payment terms according to the agreed credit terms.
But giving them credit without limits can cause financial difficulties. When customers place more orders and the previous ones are not settled, the scenario continues.
To mitigate this risk, companies set credit limits.
For instance, let’s say a distributor has an approved credit limit of ₹5 lakh. The customer already has good business transactions of ₹4,60,000 to his credit. The total exposure could go beyond the approved limit if the customer places another order of ₹1,00,000.
The company might want to look into the order before proceeding with the delivery process.
This is where SAP SD credit management comes in handy.
What does the SAP SD do when it checks the Credit limit of a customer?
SAP can check the credit of the business during the sales order process, depending on the settings configured in the business.
The system analyses the credit that is relevant to the customer, including their credit exposure and the amount of credit that is available. Depending on the configuration, the check will take into account open orders, deliveries, billing documents and outstanding receivables.
Let’s take a simple example:
Particulars Amount
Approved credit limit ₹5,00,000
Existing credit exposure ₹4,60,000
New sales order ₹1,00,000
Total potential exposure ₹5,60,000
Amount above the limit ₹60,000
In this case, the new order might cause a credit warning or credit block (depending on the credit-check configuration set by the company).
However, it is crucial to know that SAP is not only based on the new order quantity. It rates the relevant credit exposure based on the guidelines set by the organisation.
When the Sales Order is blocked by SAP what happens?
A credit block does not necessarily mean that the customer has been rejected permanently. It means that the transaction needs to be paid to.
For instance, when a salesman gets a new order from a frequent customer. System determines customer’s credit exposure exceeds the approved limit during sales order creation.
A credit related block may then be ordered on the order.
This results in an interdepartmental review process:
- The sales team verifies the order and business need of customer.
- There is a finance team reviewing outstanding invoices and payment history.
- The credit management team reviews the credit status of the customer.
- The question of whether the order can be released is at the discretion of an authorised person.
With the necessary approval, the order can continue as per the business rules of the company.
Students need to be aware that the exact blocking and release process will vary, depending on the SAP version and configuration.
What Process is Used to Review and Release Sales Orders that are Blocked?
The tools available in SAP enable authorised users to review information about credit-related blocks.
In SAP ECC, the following are often connected to credit management and blocked sales documents: VKM1 and VKM3. They are available and utilized based on the system set up.
Credit management functionality can be managed in SAP S/4HANA via SAP Credit Management, with all the relevant applications and workflows.
The responsible person can review during a review:
Payment history of customers: Is the customer paying on time regularly, or are there frequent delays?
Outstanding balances: What is the customer’s current outstanding balance?
Open sales documents: do there exist other sales or deliveries that are part of the customer’s credit exposure?
Business significance: Do you need an authorised credit review for the new order?
Once the information has been reviewed, the authorized team may choose to release the blocked document or to hold the document.
No sales executive should make a credit decision without it being authorized by someone else.
How SAP SD is related to SAP FICO?
This is a typical scenario of integration between two important SAP modules.
Sales activities like customer orders, deliveries and billing are managed by SAP SD. Financial Accounting helps the organisation to keep track of financial transactions and customer receivables and is supported by SAP FICO.
In a credit sales transaction, the sales process and financial records are tied together.
For example:
- A customer order is created by the sales team in SAP SD.
- Credit check is a measure of the customer’s credit situation.
- Following the necessary checks and approvals, the delivery process continues.
- Billing is the process of generating the necessary financial document.
- The receivable is reflected in the customer’s account.
- Once they take payment, they deduct the remaining balance from the balance in the accounting process.
This linkage assists businesses to keep a better track of customer transactions.
Many companies require SAP professionals to understand how one activity impacts on another, which is very beneficial to learners when they grasp the relationship between SD and FICO.
Practical Exercise on SAP SD Students
Part of the learning should involve an actual scenario instead of merely reading about credit management within an SAP training environment.
Let’s consider a customer who has a credit limit of ₹3,00,000, and existing credit exposure of ₹2,80,000. The customer has placed a new order of value ₹50,000.
Make an effort to interpret the following activities:
- Determine who the customer is and read the credit data.
- Create a sales order with the respective sales area.
- Check to see if the credit check you have configured displays a warning or block.
- Review order status and understand possible limitations for further processing.
- Use system tools to review the credit-related information.
- Learn about how an authorised user can unblock a document.
- Once the necessary approvals are given, see how the order is being carried out.
This exercise should be done using the correct credit-management configuration. The goal is to see the whole business process and not remember transaction codes.
What do Students need to know beyond basic Sales Order Creation?
Generating a Sales Order is just the beginning of dealing with SAP SD. In addition, a good knowledge of the module should include knowledge of the way in which companies regulate their sales activity.
Students are to know:
- Customer master data and partner functions.
- Create Sales document types and item categories.
- The pricing and sales order process.
- Checks and processing for deliveries.
- The handling of goods that are shipped and billed.
- Credit management fundamentals.
- Integration between SAP SD and SAP FICO.
These concepts enable students to comprehend the customer’s request and journey through the organisation from order through to payment.
Use Realistic SAP SD Practice that includes Version IT.
To make learning SAP SD more relevant, students need to grasp the reason of the different configurations and transactions in the business scenarios.
Version IT provides structured learning and hands-on practice for any students eager to learn more about sales processes related to SAP SD. Key points are sales order management, delivery processing, billing, pricing and customer master data, among others, and their integration into other SAP modules.
It is important for learners to know why an activity is being performed, what information the system is looking for, and how the data is used by other departments.
This can be a way to establish a starting point for new college graduates’ learning of enterprise sales. For working professionals, further enhancements of the knowledge of SAP SD operations and business workflows are possible.
SAP SD Training in Chennai equips you with the knowledge of how companies process customer orders, how to manage credit risks and how to coordinate sales activity.
Final Takeaway
Not all blocked sales orders are customer or system issues. At times it is a vital business control which helps safeguard the business against too high a credit risk. Having knowledge of the way SAP SD does this helps students to have a better understanding of how sales is done in real life.
