We all are aware that a company has both assets as well as liabilities in its balance sheet but how do it balances between these two (as increase in one may lead to losses)? How a company juggles or manages this task is called asset liability management.
It may sound simple but it is not an easy job for business executives to do so. The primary objective of any company is to maximize the wealth of its shareholders which can only be achieved by balancing assets and liabilities which in turn maximizes net earnings.
Objectives of Asset Liability Management
Asset and liability management (ALM) may vary from one company to another depending largely upon the business models adopted by them. Every company focuses on mitigating liquidity risks i.e. to be able to meet its obligations as and when these arise, ALM helps in maintaining the funds with a bank eradicating liquidity risk.
ALM helps to keep in check interest rates risk. In this era, every company has certain amount of loans to its liabilities side which might increase the possibility of interest rates rising creating a risk. ALM ensures that there is a balance between bank deposits and loans so that such a situation can be avoided.
Conclusion
We can conclude that ALM not only helps in risk management but also in strategic planning as it ensures that a company has long-term assets to meet its liabilities maximizing returns.
