Mitigate Foreign Trade Payment Compliance Risk Using the Cockpit for Documentary Payments
- by Patrick Imhen, Business Analyst and Senior SAP MM/SD/PM Functional Consultant, ZOCODE Limited
- March 31, 2017
Learn how the Cockpit for Documentary Payments can be used to facilitate international customers’ payment compliance, thereby reducing the risk of doing foreign trade. Follow steps to implement the Documentary Payments component in SAP sales and distribution (SD).
By reading this article, you will learn how to:
- Use the Documentary Payments component to mitigate payment compliance risk for foreign trade
- Configure the Documentary Payments component in SAP ERP
- Use the Documentary Payments Cockpit functionalities in a letter-of-credit scenario
- Activate the SAP Documentary Payments component for item categories
The Cockpit for Documentary Payments provides automated financial documents to facilitate payment guarantee procedures required to ensure that international customers trade transactions comply with the agreed-upon business terms. Some of these payment guarantee procedures are letter of credit, documents against payment (d/p) and documents against acceptance (d/a). The Documentary Payments component is fully integrated in the SAP sales and distribution (SD) - Credit Management component and it is under SAP ERP (Sales and Distribution – Foreign Trade).
In this era of globalization, the business requirement for foreign trade is increasing by the day. One major concern with organizations is the need to be able to enjoy guaranteed business-to-business international sales transactions where every party involved keeps to the agreed-upon business terms, especially the payment terms. This concern is more with foreign companies that engage in foreign trade with companies in developing countries. Based on this requirement, SAP has provided the Documentary Payments component that can help organizations achieve a high level of foreign trade payment compliance by providing an automated consistency check of sales transactions with agreed-upon financial documents. This data is leveraged to facilitate payment guarantee procedures required to ensure that international customers’ trade transactions comply with the agreed-upon business terms. This has helped these export organizations reduce payment risk by ensuring that payment is on time and in full.
Documentary payment is a business-to-business procedure used to guarantee the payment of goods when dealing with international sales transactions. It entails that the customer must present certain credible documents that can guarantee the payment of goods within a specific time frame. It is a kind of credit that is only relevant for international trade transactions.
The Documentary Payments component provides several payment guarantees, including letter of credit (L/C), open account (O/A), document against payment (D/P), document against acceptance (D/A), and cash against document (CAD). This article is not focused on how documentary payments procedures are transacted, but on how the Documentary Payments component is leveraged to achieve the objective of payment guarantees using the Cockpit for Documentary Payments.
The Cockpit for Documentary Payments is an interface that allows convenient access to the Documentary Payments component’s functionalities. Documentary payments are processes in which an exporter and an importer both reach certain terms of trade agreements and certain financial institutions such as the banks are used as intermediaries to guarantee, validate, and receive payments; issue instruments; and confirm documents on behavior of the exporter or importer.
This article is focused on the letter of credit because it is the most secure way to obtain a payment guarantee. For more information on the different Documentary Payments procedures, get materials on payment guarantees for international trade.
How the SAP Documentary Payment Is Applied to Mitigate Payment Compliance Risk for Foreign Trade
The first thing to consider is what the likely risks scenarios faced by export organizations are. Here are some scenarios to consider:
- Goods can be shipped to a customer and the customer will not pay on time.
- Goods can be shipped to a customer and the customer will not pay completely.
- Goods can be shipped to a customer and the customer will not accept the shipment.
- Goods can be shipped to a customer and the customer may not be able to pay and then it becomes a bad debt.
These are some of the risk scenarios encountered by organizations especially dealing with customers in developing countries where there are no well-established standards for doing business, unstable government policies, a high level of corruption, or market instability. This causes such customers to be rated as high risks for credit.
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