Credit Checking

Credit checking is used to determine a customer's credit status.  It is performed automatically by the system at the beginning of sales order entry and after the operator finishes entering a sales order.  If the customer fails the credit check, the order is placed on credit hold and is reported on the Credit Exception Report.  Credit checking may be performed for quote orders depending on the default option chosen.  For realized quotes, credit checking is performed again.

The system can check the bill-to customer for three credit exceptions:  accounts receivable overdue, customer commitment exceeds credit limit, and order exceeds maximum order amount.  The first two types of credit checks can be performed for the individual bill-to customer or at the corporate customer level.

The type of credit checking performed is specified on the Credit Check Type field on the bill-to customer's Customer Master file record.  The credit check type determines which of the three checks will be performed, and whether they are performed at the individual or corporate level.  In the case of multiple error exceptions, the system displays them in the following priority:

·      Accounts receivable overdue.  A customer is checked by one of two methods, depending on the selection made on the Customer Master file.  The two methods are accounts receivable amount overdue and accounts receivable days overdue.  For the amount overdue method, the customer's overdue balance is compared to the customer's accounts receivable overdue amount limit.  An exception occurs if the amount overdue is greater than the limit.  For the days overdue method, the customer's oldest unpaid invoice is aged.  An exception occurs if the number of days this invoice is overdue exceeds the customer's limit.

If corporate credit checking is used, the amount or days overdue is checked for all subsidiaries within the corporate customer organization.  For the amount overdue method, the total overdue balance for all customers associated with the corporate customer is compared to the customer's accounts receivable overdue amount limit.  An exception occurs if the amount overdue is greater than the limit.  For the days overdue method, the oldest unpaid invoice for each subsidiary customer is aged.  An exception occurs if the number of days overdue for any subsidiary exceeds the corporate customer's limit.

·      Customer commitment exceeds credit limit.  Customer commitment is calculated using the following formula:

On Reference File category 029, Customer Defaults, you can specify whether the on-order or on-reserve amount will be used in calculating total customer commitment.  This category is required to perform credit check processing.

If corporate credit checking is used, the commitment amounts are totaled for all customers associated with the corporate customer.  If the total corporate commitment exceeds the corporate customer's credit limit, an exception results.

·      Order exceeds maximum order amount.  The order amount is compared against the maximum order amount on the Customer Master file record.  An exception results if the order exceeds the customer's limit.  This credit check is never performed at the corporate level.

·      Customer hold:  If the customer has been placed on customer hold through the Customer Master Maintenance conversation, a credit exception will result when credit checking is run.

If any of these exceptions occur, a Credit Exception Report is prepared for the credit manager.  An order with a credit exception cannot be released until an authorized user approves the exception.  If authorized, the operator may alter the sales order's hold code through the Sales Order Maintenance conversation, or alter the quote order's hold code through the Quote Order Maintenance conversation, to release the order.

An installation option (credit hold release indicator) can override this process and permit normal release of orders with credit exceptions.  When this parameter is set to "yes," the order is placed on a warehouse shipping document and released despite any credit exception.  The exception, however, is still reported to the credit manager.

The table below illustrates how credit checking is performed for an individual bill-to customer.

       Credit Checking

The figure below illustrates how corporate credit checking is performed.

The following corporate structure is assumed:

Customer 003 places an order for $500.  This order is well below customer 003's order limit, and the customer has no past due balance.  If corporate credit checking is not used, this order will not generate an exception.  The total A/R balance for all three entities in the corporate structure is $60,000, which is below the corporate credit limit.  However, the total past due balance for all entities is $15,200.  This exceeds the corporate customer's past due A/R limit of 15,000, so an exception will be generated.

The system performs credit checking at the beginning and end of online entry in every conversation except Sales Order Inquiry and Quote Order Inquiry.  A message is displayed if the order is placed on credit hold.

Considerations

The five types of credit checks provide the flexibility needed to accommodate a range of credit policies.  Implementing a credit restriction policy involves setting the credit limit or maximum order amount fields to low values.  These limits can be easily adjusted to reflect a company's current financial position, and therefore the ability to absorb short term credit losses, or a change in the company's standard credit policy.  The limits can be altered according to individual customers to reflect recent credit performance.  The corporate credit checking feature allows you to set credit limits for each subsidiary independently, while retaining control over the corporation's total indebtedness.  The Corporate Customer Inquiry, within Order Processing, and Corporate Customer Credit Report, within Accounts Receivable, can be used to determine the credit position for all subsidiaries within a corporate customer structure.

An additional control feature prevents new orders from being entered for a customer.  If the transactions allowed flag on the Customer Master file is set to "no" in Customer Master file Maintenance, new orders cannot be added for the customer.

Orders are placed on hold only during order entry, during order release, or as a result of manually placing a customer on hold.  Credit exceptions at other stages in the life cycle of an order only generate warnings.  The order is not placed on hold.