Also known simply as ALM, asset liability management is the process of responsibly managing the balance between the debts and assets owned by the business or other entity. The idea is to make sure that the liabilities or debt carried by the entity is kept in proportion with the assets that are on hand. Many businesses engage in the process of asset liability management, including banks, insurance providers, and even small businesses.
With banks, the process of asset liability management is often focused on maintaining an agreeable balance between the amount of customer deposits and the amount of the loans issued by the bank. Ideally, that balance will prevent the bank from overextending the amount of debt it assumes as a result of making loans to various customers. This balance helps to protect banks from being especially vulnerable should any sudden change in interest rates take place, as well as keep the bank solvent in the face of credit changes or unforeseen issues with liquidity.
When it comes to insurance providers, the focus of asset liability management has to do with the relationship between premiums collected on policies and the amount paid out in claims. As with banks, insurance providers seek to make sure enough money is coming in from premium collections that all outstanding claims can be settled quickly and efficiently. Following and managing this relationship effectively helps to ensure that the provider can service all accounts promptly, and also be in a position to write new policies over time.
Businesses of all sizes, including small businesses, pay close attention to asset liability management. This is particularly true when considering the purchase of new equipment needed for the operation of the company. One approach would be to pay cash for the purchase, which in turn would decrease one asset while it created a new one. A second approach would be to take out a loan, making it possible to acquire an asset, but also creating a liability. Depending on the overall balance between existing assets and liabilities, one strategy is likely to be more suitable for the business than the other.
Today, many entities engage in this task with the use of asset liability management software. By using the software to create specific guidelines for the relationship between debts and assets, it is possible to quickly determine the current balance at any given point in time. This can help the entity identify a possible financial crisis before it becomes a major problem, and resolve the issue with a minimum of trouble. Companies that underwrite asset liability management insurance often provide discounts for customers who have this type of resource in place, providing one more reason to make use of software to aid in the process of asset liability management.