Financial terms like assets, liabilities, investments and more can be scary and confusing to understand. Manoeuvring the world of finance is scary mainly because each business decision can have a big monetary impact, whether for good or for bad. This is why it’s okay to take your time and learn the basics before jumping into the more complicated terms. Before understanding the concept of asset and liability management, let’s first understand what exactly asset and liability means.
In simple terms, an asset can be
defined as anything which is of value that can be converted to cash. Assets can
be tangible or even intangible. Furthermore, these assets can be divided into
the categories of current and fixed assets. The correct value of a company’s
asset is recorded in the balance sheet of the company. On the other hand,
liability is something that a person or company owes to another entity. It is
the financial obligation of a company over another. It is legally paid to the
person in the future, either in the form of an asset or service.
Asset and liability management means
managing the financial risks of a company that can arise due to a mismatch in
the company’s assets and liabilities. It is a practice of maximizing profits
and mitigating risks of liquidity and change in interest rates. While
traditionally, finance companies in
India only concerned themselves with liquidity and interest rate risks, the
concept of asset and liability management has now broadened to include foreign
exchange and capital market risks as well. ALM is adopted across various
financial organizations including banks, insurance companies, asset managers
and more. Adoption of ALM can help organizations prepare for future risks in a
better way. This is because they’ll be in a better position to manage their
liabilities strategically. More and more companies today have adopted ALM
strategies with the help of financial firms and consultants.
No comments:
Post a Comment