Asset and Liability Management (ALM) is an important financial consideration for many businesses. This is essentially managing the use of assets and cash flows for a company to reduce their risk of loss for not paying a liability on time. When assets and liabilities are managed correctly and efficiently, it can enable a business to increase its profits rather than losses. Here we’ll answer a few common questions about ALM.
Why Use ALM?
A strong ALM system is needed to create an efficient process, increase productivity and avoid various errors that can negatively impact upon a company’s finances. It can be a tedious thing to manage without a proper system in place or outsourcing to experts such as consultants like Hymans Robertson who have years of experience in ALM.
Otherwise businesses can end up making mistakes such as purchasing assets which you already have an investment in or missing out liabilities. Timely reminders and reports through using asset and liability management will prevent this from happening, creating a more efficient and productive process that should help improve your business.
When is It Used?
ALM is mainly used for bank loan portfolios and pension plans. Bank use of ALM is mainly used when there’s a mismatch between assets and liabilities. The amount of customer deposits and lending, including all the rates and terms agreed, needs to be taken into account to arrange the best balance possible.
This needs to protect the bank in any event where sudden changes in interest rates may make them vulnerable. For example, if interest rates go up to higher than the bank is currently charging then it will make a loss. If they go down then it will make more money than anticipated, both scenarios that can affect cash flow situations.
What About Corporate Use?
Businesses outside of the financial industries can still use ALM for various purposes. It can be vital for evaluating and improving any funding structures, to make better informed business decisions with more awareness about risk exposure, thanks to the guidance of experts.
Depending on the industry this can range from things like logistics firms using ALM to assess risks based on changing oil prices. In some cases, this has resulted in businesses hedging fuel prices to reduce their exposure to the volatility of oil prices, for example.
ALM can be highly beneficial for companies across a wide variety of industries and of differing sizes.
Sources: hymans.co.uk / investopedia.com / treasurytoday.com
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