7Manage Credit Management

This chapter contains the following:

Credit Management provides a comprehensive system for developing and implementing policies and procedures to help you manage credit-related data and make intelligent credit decisions about your customers.

Credit Management is part of the Credit-to-Cash solution for capturing orders, billing customers, processing payments and adjustments, and managing all related accounting. The Credit Management solution includes the following processes:

  • Credit profiles and policies

  • Credit reviews

  • Credit review management

  • Credit management tools

Credit Profiles and Policies

Create a credit profile for each of your customers and customer accounts. The credit profile contains key information for establishing the creditworthiness of each of your customers, including credit classifications, credit limits, and credit review cycles.

You can set up a credit-only profile at the customer, or party, level for enterprises with an extended hierarchy of businesses. You can also create specific profiles for individual customer accounts.

Credit Reviews

A credit review begins when a credit-related event takes place.

There are three events that initiate credit reviews:

  • A customer fails a credit authorization request.

  • A customer is included in a scheduled run of the Periodic Credit Review process.

  • A credit analyst initiates a credit review for a new customer or for an occasional review of an existing customer.

All credit reviews begin with the creation of a credit case folder. The case folder is the central document that a credit analyst uses to review and make decisions about a particular customer credit review.

Credit Review Management

Use the Credit Reviews work area to review and manage credit case folders. Credit analysts can search case folders, view high-level information about their case folders, and take actions such as create a new case folder, reassign a case folder to another analyst, and close case folders.

The credit analyst uses the case folder to:

  • Review a customer credit score.

  • Where necessary, update the data point values that affect a credit score.

  • Provide recommendations for customer credit.

The credit manager can perform the functions of the credit analyst, as well as oversee the case folders of all his or her credit analysts, and approve or reject credit decisions.

Credit Management Tools

Credit Management provides tools for developing an analysis of customer creditworthiness and making informed credit decisions.

The Credit Management tools include:

  • Scoring models: Design scoring models to calculate a credit score based on credit data specific to a customer or customer account.

  • Data points: Enter and maintain detailed information about customer financial and accounting history to develop a picture of customer creditworthiness.

  • Case folder templates: Create case folder templates for different types of credit reviews, and automatically assign a specific template to a case folder during the initial credit review and case folder creation process.

A credit case folder is a record that contains the set of data used to conduct a credit review of a customer or customer account, or of a customer account with an individual credit request source transaction.

A credit case folder contains the following data and tools:

  • Customer or customer account information, including the case folder currency and the current credit limit.

  • Credit classification and review type for this case folder.

  • If the Review Type is Credit Checking Failure, information about the failure, including the requested amount, the customer's available credit, and information about the source transaction that initiated the credit authorization request.

  • Credit case folder template assigned to the case folder, used to define the type of scoring and data points available.

  • Data points needed for the credit analysis.

  • If applicable, a scoring model to calculate the credit score.

  • Actions and Recommendations for the credit review.

The review types are:

  • Ad Hoc Review: initiated by manually creating a credit case folder.

  • Credit Checking Failure: initiated by a credit checking failure.

  • Periodic Review: initiated by a periodic review of the credit of a customer or customer account.

Note: In cases where one customer account calls the credit checking service more than once with different requests, and each of these requests results in a credit checking failure, then a separate credit case folder is created for each credit checking failure, identified by the customer account and the source transaction that initiated the credit authorization request. If such a credit request is approved, a credit authorization is created for the customer account using the attributes of the source transaction.

The case folder creation process involves these steps:

  • The active case folder template is selected for the combination of credit classification and review type. If the customer or customer account credit profile doesn't have a credit classification defined, then the default case folder template is used.

  • The case folder template is used to display in the case folder the required and optional data point values to use for the credit review.

  • If the case folder template contains a scoring model, the case folder displays the data point values needed for the credit score calculation, and the scoring model attempts to calculate the credit score.

  • If the credit score calculation is successful, the score is displayed in the Credit Score field. The available hyperlink opens the Scoring Details page for review of the scoring calculation.

    If the credit score calculation is not successful, due to missing data point values, you must enter or populate the necessary values to calculate the score.

  • The user who creates a new credit case folder is designated as the credit analyst for the case folder. The case folder created by credit checking failure or periodic review is assigned the credit analyst for the applicable customer or customer account, if defined in the credit profile.

The new case folder is assigned an initial status and is displayed first in the Credit Reviews work area.

When a credit check is initiated, the credit checking process ordinarily looks for a credit limit value in the customer account profile and, if no value is found, in the customer profile. Once a credit limit value is found, credit checking proceeds to verify the customer's credit for the given credit authorization request.

You can also define a party-level hierarchy for a customer. If you use a party-level hierarchy, then the credit checking process uses the credit definitions in the party hierarchy to determine the customer credit limit.

The party-level hierarchy is set up using the Manage Hierarchies setup task. To use a particular type of hierarchy in Credit Management, you specify the hierarchy type using the Hierarchy Type for Credit Management profile option. The default value for this profile option is None, meaning no customer hierarchy is used by Credit Management unless you assign one. If you want to use a party-level hierarchy, set the Hierarchy Type for Credit Management profile option value to the correct hierarchy type as defined in the Manage Hierarchies setup task.

If a party-level hierarchy is defined for a customer, then the credit checking process first derives a credit limit from the parent party in the hierarchy, and then considers the available credit for each child party in the hierarchy to find the actual credit limit.

For example, consider the following party-level hierarchy for Vision Corporation:

This figure illustrates the hierarchy of Vision
Corporation, with the main parent company, four child companies, and
the accounts for each child company.

The party profile credit limit defines the total credit amount that all children have available. In this example, Vision Corporation has a credit limit of $50 million. The actual credit limit for a given party is derived by considering both the defined credit limits and the children that don't have a credit limit defined.

Vision USA has a credit limit of $20 million available to its three accounts. Account 1 has a specified credit limit of $5 million, so Account 2 and Account 3 together can use up to $15 million.

Vision Middle East has a credit limit of $3 million available to its two accounts. Account 7 and Account 8 together can make use of this $3 million.

Vision Canada and Vision Mexico don't have credit limits defined, so effectively these parties can make use of the undefined $27 million in credit.

If, for example, Vision Canada Account 4 submits an order for $2.5 million and Vision Mexico Account 6 submits an order for $3.5 million, then after these orders are authorized, the remaining credit available to Vision Canada and Vision Mexico is $21 million.

A data point is a single piece of credit information that pertains to a customer. Examples of data points include the number or amount of past due invoices; bank account average balance; percentage of invoices paid promptly; and the customer's credit ratings with external agencies.

The data points assigned to a case folder form the basis for making determinations about a customer's creditworthiness. A collection of specific data points is also used by a scoring model to calculate the customer's credit score.

Data Point Categories

Credit Management provides a set of predefined data points in several categories.

These categories are:

  • Aging: Data related to customer open balances.

  • Bank References: Information about customer bank accounts.

  • Billing and Payments: Customer transaction and payment history.

  • Business Information and Credit: Data related to customer credit history, both within your own enterprise and with external credit agencies and monitoring services.

  • Collateral: Information about customer collateral, as it relates to establishing or requesting credit.

  • Financial Data: Data related to the health of a customer business, such as profits, losses, and cash flow.

  • Guarantors: Information about third parties willing to guarantee customer credit.

  • References: Information about third parties that provide references for the customer.

  • Trade References: Information from third parties in the same trade that provide statements of creditworthiness for the customer.

  • Venture Funding: Information about investment funding for the customer.

  • Additional: Additional data points available for user-defined categories and values.

Scorable and Non-Scorable Data Points

Use scorable data points to provide numeric financial data about a customer and to create a scoring model. Use non-scorable data points for additional reference information.

For a scoring model, a scorable data point requires you to enter possible value ranges for the given item of data and to assign a numeric score to each value range to reflect the possible credit risk.

For example, the data point that identifies the count of customer past due invoices may have ranges from 0-10 (low credit risk), 10-50 (moderate credit risk), and 50-100 (high credit risk).

A non-scorable data point provides additional reference information for a credit review, independent of the score calculation. This additional information can be a factor in making a credit decision.

For example, if a customer has a business location in a high-risk country, this can potentially reduce its credit rating.

The credit case folder displays in the Data Points section the data points available by default for the credit review. These default data points are supplied by the credit case folder template.

Data points are grouped by data point category in alphabetic order. Within a category, the required data points are listed first, followed by the optional data points.

Receivables populates the Data Points section with all system-derived data point values. You can't update these values. A warning icon appears next to each required data point that doesn't have a value populated.

You can save a case folder without completing all of the required data point values, but you can't approve a case folder until all required values are entered and, if a scoring model is used, the credit score is calculated.

Entering Data Point Values

During a credit review, you can add optional data points to the case folder and remove default data points that were set as optional in the case folder template. If you are using a scoring model, then any values you enter in optional data points that are scorable are included in the credit score calculation.

Enter in the Value fields the remaining data that you need for your credit determination. You can either enter a value directly or import third-party data for the specific customer or customer account.

The values for data points in the categories Aging, Billing and Payments, and Business Information and Credit that relate to customers and customer accounts are system-derived. You can't enter values for these data points in a case folder. If a value is missing for one or more of these data points, you must refresh the summary tables that maintain this data, and then refresh the case folder, to populate the required fields.

Updating a Scoring Model

If you are using a scoring model and the credit score was not calculated, use the Scoring Details page to complete the data point values. In the Credit Score field, click the Pending calculation hyperlink to navigate to the Scoring Details page.

You can enter and import missing values, or refresh system-derived values. You must ensure that you enter values within the ranges defined for each data point in the scoring model.

When you have completed your updates to all data point values, use the Calculate button to calculate the credit score and remain on the page. Use the Save buttons to calculate the credit score and return to the case folder. If necessary, continue to update data points until the credit score is calculated.

After reviewing all of the available credit information and calculating the credit score, complete the credit review process by recommending how to proceed with the credit status of this customer or customer account.

Use the Recommendations section to enter this information. Use the Plus (+) icon to open one or more rows for entering your recommendations:

  • The Type column indicates the actions available to you.

  • The Current Value column displays current profile settings for the customer or customer account.

  • The New Value column lets you enter and update specific recommendations.

The following table lists the recommendation you can make for each type:

Type Recommendation

No change

Maintain the current record for the customer or customer account. If the credit review is due to a credit checking failure, the credit authorization request is denied.

Approve Source Transaction Credit Request

For the Credit Checking Failure request type only. If you enter Yes, a credit authorization is created for the customer account using the attributes passed through the credit checking service, regardless of whether sufficient credit is available.

Decline Source Transaction Credit Request

For the Credit Checking Failure request type only. If you enter Yes, credit authorization is declined for the customer or customer account.

Place customer on credit hold

The customer or customer account is placed on credit hold and any credit authorization request is denied.

Release customer from credit hold

The customer or customer account is released from credit hold and can initiate new credit authorization requests.

Set credit classification

Change the credit classification for the customer or customer account.

Set credit limit

Increase or decrease the credit limit for the customer or customer account.

Set order amount limit

Increase or decrease the order amount limit for the customer or customer account.

Set credit review cycle

Change the credit review cycle for the customer or customer account.

Set next review date

Enter a specific date for the next credit review for the customer or customer account.

These updates apply to the recommendation types:

  • No change: You can't enter any other type.

  • Source transaction credit request types: These two types are mutually exclusive.

  • Credit hold types: These two types are mutually exclusive.

  • Credit profile types: The customer or customer account credit profile is updated with the new values you enter here.

If you are updating the credit limit, you must respect the customer hierarchy, if one exists:

  • If you increase the credit limit, ensure that you don't increase a child credit limit to cause the sum of the children to exceed the parent credit limit.

  • If you decrease the credit limit, ensure that you don't reduce the parent credit limit below the sum of the credit limits of the children.

After completing your credit review and entering recommendations for a given credit case folder, you can approve the case folder.

Depending on your business practices, a credit analyst with the authority to approve a case folder can either provide final approval, or approve and assign the case folder to another designated approver. Until a credit case folder has the status Approved or Closed, you and other designated approvers can continue to work on the case folder.

Note: You don't need to set up approval limits and hierarchies of approvers in advance in order to assign case folders to other analysts for review and approval.

To approve a credit case folder:

  1. Navigate to the Credit Reviews work area.

  2. Open the credit case folder.

  3. In the Data Points section, complete the editing of data points and the entry of data point values according to the setup of the credit case folder template.

  4. If you are using a scoring model, use the Scoring Details page as necessary to complete data point values and calculate the credit score.

  5. In the Recommendations section, complete the rows needed to indicate how to proceed with the credit status of the customer account for this credit review.

  6. From the Actions menu, select Approve.

  7. In the Approve window:

    • Select the Approve case folder radio button to approve the case folder.

    • Select the Approve and specify the next approver radio button to indicate your approval and to assign the case folder to the next approver.

    • Enter any comments in the Comment field.

  8. Save your work.

If you select the Approve case folder radio button, the case folder status is set to Approved and the recommendations assigned to the case folder initiated. The case folder status is updated to Closed after all recommendations are successfully implemented.

If you select the Approve and specify the next approver radio button and designate another approver, the case folder status is set to Pending Approval and the case folder is assigned to this approver (credit analyst or credit manager). The next approver can either approve the case folder, reject the case folder, or approve and assign the case folder to another approver.

Use the Periodic Credit Review process to perform a credit review of applicable customers and customer accounts.

You create the periodic credit review definition for your customers and customer accounts in the credit profile. The important values in the credit profile are:

  • Credit Review Cycle field: Defines how often customers with this profile are subject to a periodic credit review: Quarterly, Semiannually, Annually. In general, customers with a higher degree of credit risk would be subject to more frequent reviews.

  • Next Review Date field: Contains the date of the next credit review for customers with this profile. This date is calculated automatically if the Last Review Date and Credit Review Cycle fields contain values.

A run of the Periodic Credit Review process includes all customers with a Next Review Date value on or before the current date and the applicable Credit Review Cycle value defined.

Note: The process only includes customer and customer accounts that have both Next Review Date and Credit Review Cycle defined. If either value is missing, the customer is not included in the process run.

After the process run, the current date is populated in the Last Review Date field, and the Next Review Date field is populated according to the Credit Review Cycle value. For example, after a credit review on January 1, 2017, quarterly reviews are assigned a next review date of April 1, 2017; semiannual reviews, July 1, 2017; and annual reviews January 1, 2018. You can change the default Next Review Date and Last Review Date values at any time, according to your credit policy and business requirements.

Process Parameter

Use the Order Output By parameter to order the report data by customer, customer account, or next review date.

The program only provides this parameter, and includes all eligible customers and customer accounts in the review. You can't run the Periodic Credit Review process for a subset of customers or customer accounts eligible for credit review.

Periodic Credit Review Report

Use the Periodic Credit Review Report to review a run of the Periodic Credit Review process.

The process creates a new case folder for each applicable customer or customer account and assigns the case folder to a credit analyst. The process also records the customers that already have active case folders.

The report provides separate sections for customers that had new case folders created and customers that already have currently active case folders.

This table describes the column headings in the report output:

Column Heading Description

Customer

The name of the customer.

Customer Account

The name of the customer account.

Credit Classification

The credit classification for the customer or customer account.

Credit Review Cycle

The credit review cycle for the customer or customer account.

Next Review Date

The date of the next credit review.

Case Folder Created

The credit case folder number.

Credit Analyst Assigned

The name of the credit analyst assigned to the case folder.

FAQs for Manage Credit Management

After the credit limit is derived for the applicable customer or customer account, the credit limit amount is compared to the sum total of all activity belonging to the customer parent entity and any child entities, if applicable.

The available credit for the customer or customer account is calculated as:

Total Defined Credit Limit - Open Credit Authorizations - Open Receivables Balance = Available Credit

If after conversion to the credit currency the sum total is equal to or greater than the defined credit limit, then the customer has exceeded the credit limit and a credit review is initiated.

In the Review Type field, click the value Credit Checking Failure to display the Credit Checking Request Information window.

The Credit Checking Request Information window provides details of the failed credit check:

  • The Transaction field value is a combination of the type of the source transaction and the source transaction number.

  • The Customer and Customer Account fields display the customer and customer account requesting the credit authorization.

  • The Contact field displays the customer account contact on the source transaction.

  • The Requested Amount field value displays in the requested authorization amount currency.

  • The Available Credit field value displays in the customer or customer account credit limit currency.

  • The Preauthorization Request field indicates whether a case folder is created from a preauthorization failure.

    If the value in this field is Yes, then the application that called the credit checking service requested that a case folder be created if the preauthorization request failed.

Use the Additional data point category to define your own data points for use in the calculation of a credit score.

The Additional data point category provides fifteen data points with these data entry types: Data Point 1 - Data Point 6: alphanumeric data points; Data Point 7 - Data Point 12: numeric data points; Data Point 13 - Data Point 15: date data points.

Additional data points follow the same rules for weight, range, and score values as all other data points.

After you confirm a run of the Process Receivables Transactions for Customer Account Summaries process to successfully update and refresh the AR_TRX_BALANCES_SUMMARY and AR_TRX_SUMMARY tables, you can refresh your case folders.

Open any applicable case folder and select Refresh Data from the Actions menu. If the case folder uses a scoring model, then the credit score and available credit are recalculated.

A point earned is the score assigned to a data point value, determined by the scores assigned to the data point ranges in the scoring model.

For example, if Data Point A is set up with a score of 5 for the range of values 1 > 50, and a score of 10 for the range of values 50 > 100, then if the value of Data Point A in the case folder is 32, the point earned is 5.

A weighted point earned is (point earned x the weight assigned to the data point). So if the point earned for Data Point A is 5, and the weight given to Data Point A in the scoring model is 50, then the weighted point earned is 250 or 2.5, expressed as a percentage.

The calculation of a credit score is the sum of the weighted points earned expressed as a percentage.

After you complete all recommendations in a case folder, the case folder status is automatically updated from Approved to Closed. You can also close a case folder using the Close action.

A Closed case folder generates a public Credit Case Folder Closure business event. This business event contains the following information:

  • Key attributes of the case folder, including case folder number, status, credit analyst, creation date, and last update date.

  • Key attribute values that the application calling the credit checking service passed using the latest credit checking service call, including customer, customer account, requested authorization amount, and source transaction information.

  • If Approve Source Transaction Credit Request is one of the recommendations, the key attributes of the new credit authorization record, including credit authorization number, authorization expiration date, and authorization amount.

  • If the case folder was approved, a list of all approved recommendations, including new values in the credit profile for credit limit and credit classification.

You close a case folder if you determine, according to your business practices, that the credit review is no longer needed.

For example, the customer may no longer need the pending orders or is no longer in business. You can't reopen closed case folders. If necessary, you must manually create a new case folder.

You can withdraw a case folder that is pending approval with designated approvers.

You usually withdraw a case folder when you need to add or update information pertinent to the case folder approval process. After entering your updates, you can submit the case folder again for approval.

You reject a case folder if you don't agree with the case folder recommendations.

Only a user with the appropriate permissions can reject a case folder, often a credit manager. A rejected case folder is returned to the credit analyst for further review. After the appropriate review and investigation, the credit analyst can submit the case folder again for approval.