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Credit Management Part 1: Credit limit automation


Hitachi Solutions > Blogs > 2020 > 06 > Credit Management Part 1: Credit limit automation

In the last few weeks, I have been exploring the new credit management feature released by Microsoft, in order to understand how this new feature can be useful and incorporated in the business context. I will share with you some capabilities, configuration, and examples of this feature to show you how this can be easily adapted to the business.

This post deals with credit limit automation by using credit adjustments enabled through the credit management feature released by Microsoft in April 2020.

How to enable credit management feature

Credit management feature is enabled through the Feature Management Workspace in any version from 10.0.9 (PU33). The credit management feature is considered as part of the Accounts Receivable (AR) module, so by filtering for AR module it is easy to find, then to enable just use the button “Enable Now” that appears in the details pane of the feature.

By suggesting credit control activities and automation, credit management can improve cash flow, reduce financial risk by managing credit risk, and bad debts, which will help clients achieve strong business outcomes.

The credit management feature is a tool to establish rules in the company. It helps to avoid internal conflicts between Accounts Receivable and Credit and Collection teams. In the Credit and Collections module we can see the new tabs regarding credit management. (represented by the stars)

Automatic Credit Limit

In order for the system to calculate the credit limit of customers automatically, it is necessary to do some configuration: regarding parameters (1), risk classification (2), scoring groups (3) , risk score (4), and automatic credit limits (5).

1. Parameters:

The credit limit automation can be enabled by the user in Credit and Collections > Setup > Credit and Collections Parameters. It is necessary to turn off the parameter under Credit Tab and Credit Limit Fast Tab that allow the user to manually edit credit limits in the customers' form. This will mean that for any change, such as editing or granting a customer credit limit, or granting of a temporary credit limit the user will need to create a credit adjustment.

2. Risk classification

The Risk Classification setup in Credit and Collection > Setup > Credit management setup > Risk > Risk Classification, allows us to classify and rank the customers according to their risk and define the rules that govern how the credit limit will be automatically calculated in the system.

It is possible to automatically rank each customer based on the number of points, or ranking points, that they have accumulated. It is defined in intervals from 0 to 100, and it can be divided into as many risk groups as needed (e.g. Low Risk, Medium Risk, and High Risk).

3. Scoring groups

The Scoring Groups (Credit and Collection > Setup > Credit management setup > Risk > Scoring groups) assign a certain number of points depending on the characteristics of each customer, that will associate the customer to each “bucket” defined in Risk Classification.

There are various scoring groups types out of the box such as Average Payment Days, Customer Since, Average Balance, Account Status, Country,  among others, that assign the points to the customers based on fields and data provided from the system.

A scoring group based on the country can be used for example in a company that trades at an international level. Imagine a situation where the company sells to a country where it does not have contact with any credit collector. In this situation the company can define for the customers of that country a certain number of points which will turn up evaluate that customer with a higher risk score.

The user can also incorporate additional information and define and create a “user-defined” scoring groups. That means that it does not look at the system fields, it actually looks into a ranking area defined by the user.

4. Risk score

Each customer has a risk score (in the customer form, under Credit management tab on top > Risk information > Risk score) that represents the values of the scoring groups previously defined to that specific customer. To assign values to the customers it is necessary to update the fields and data in the customer master and then run a periodic job to update the risk scores (Credit and Collections > Periodic tasks >  Credit management > Update risk scores). The periodic job looks at the inputs based on the scoring groups and then assign the corresponding ranking points.

For a user-defined scoring group, it is necessary to manually update the value for each customer since is not controlled by any field in the customer form. Then the system automatically sums up the points of each scoring groups to have a value to the risk score, which will be used to assign each customer to the risk classification (low, mid, high).

5. Automatic credit limit

In Automatic credit limit form (Credit and Collection > Setup > Credit management setup > Risk > Automatic credit limits) you can defined for each risk classification group (e.g. low, Mid, High) the credit limit that will be proposed to the customer, based on each scoring group.

In addition to looking just at the score, it is possible to assign customers with the same Risk Classification e.g. “Mid” different limits based on various criteria. If the account status is Open the customer will have a credit limit of 50,000.00. If it is Hold the credit limit is 10,000.00 and if the Growth Index of the customer is greater than (or equal to) 50, the credit limit will be 20,000.00.

So, if a customer AAA has an account status defined as Open, the system will suggest as credit limit: 50,000.00. However, if a customer BBB has an account status defined as Hold and have a Growth index of 75, the credit limit suggested by the system will be 20,000.00 and not 10,000.00 (which is associate to the account status Hold). This happens because of the order of the lines defined in the Automatic Credit Limit, the system will select the credit limit based on the first criteria that it finds a match.

Credit limit adjustment

Credit limit adjustment (Credit and Collection > Credit Limit Adjustment) is a form, like a journal entry, where is possible to automatically define the credit limits or temporary credit limits, for the customers, by customer account, customer groups or for all customers at once (Generate tab on top).

Using the option of generate automatic credit limits, the system will automatically generate a list of customers and suggest a value for the credit limit by integrating data and analysed the criteria of the risk groups. Those entries can be reviewed, edited, sent for approval through a workflow (to approve a batch of credit limits adjustments or at the line level), and post in customer accounts, which will modify the current credit limit of the customer.

In the example, it was suggested by the system a credit limit of 50,000.00 for the customer, what is correct with our configurations. Looking into the customer characteristics, we can see that the customer belongs to the Mid risk group and it has an Account Status as Open.

If we changed the order in the automatic credit limit form and put the Growth Index first, the value of the credit limit should change to 20,000.00 since the customer’s growth index is 70.

Track historical credit limit

In credit adjustments form (Credit and Collections > Credit adjustments) it is also possible to keep track of the historic customer’s credit limits, both regular and temporary. By selecting to show all in the form, the system shows us a list of all the journal entries for the credit adjustments. Then you can select the credit adjustment and analyse the details.

Thank you for taking the time to read this post and I hope you found it useful. In Part 2 I will review how to manually adjust a customer’s credit limit using a journal and how to recognise credit guarantees and insurance within a customer’s credit limit.

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Margarida Santos

Margarida Santos works as a Functional Consultant of Microsoft Dynamics 365 Finance and Operations. Margarida joined Hitachi Solution Europe in 2019 and works from the Portuguese office located in Porto. Margarida has expertise in Credit and Collections and has recently embraced the Supply Chain area.

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