What is 'Asset/Liability Management'
Asset/liability management is the process of managing the use of assets and cash flows to meet a company's obligations in order to reduce the firm’s risk of loss from not paying a liability on time. If assets and liabilities are properly handled, the business can increase profits. The asset/liability management process is typically used for bank loan portfolios and pension plans.
BREAKING DOWN 'Asset/Liability Management'
The concept of asset/liability management focuses on the timing of cash flows because company managers need to know when liabilities must be paid. It is also concerned with the availability of assets to pay the liabilities as they come due, and when the assets or earnings can be converted into cash. The asset/liability management process can be applied to different categories of assets on the balance sheet.
Factoring in Defined Benefit Pension Plans
A defined benefit pension plan provides a fixed, preestablished pension benefit for employees upon retirement, and the employer carries the risk that assets invested in the pension plan may not be sufficient to pay all benefits. Companies must forecast the dollar amount of assets available to pay benefits required by a defined benefit plan. Assume, for example, that a group of employees must receive a total of $1.5 million in pension payments starting in 10 years. The company must estimate a rate of return on the dollars invested in the pension plan, and determine how much the firm must contribute each year before the first payments begin in 10 years.
Examples of Interest Rate Risk
Asset/liability management is also used in banking, given that a bank must pay interest on deposits, and also charges a rate of interest on loans. To manage these two variables, bankers track the net interest margin, or the difference between the interest paid on deposits and interest earned on loans. Assume, for example, that a bank earns an average rate of 6% on threeyear loans and pays a 4% rate on threeyear certificates of deposit. The interest rate margin the bank generates is 6%  4% = 2%. Since banks are subject to interest rate risk, or the risk that interest rates increase, clients demand higher interest rates on their deposits to keep assets at the bank.
The Asset Coverage Ratio
An important ratio used in managing assets and liabilities is the asset coverage ratio which computes the value of assets available to pay a firm’s debts. The ratio is calculated as:
Asset Coverage Ratio = [(BV Total Assets  Intangible Assets) – (Current Liabilities  ST Debt Obligations)] / Total Debt Outstanding
where BV is short for book value, and ST is short term.
Tangible assets, such as equipment and machinery, are stated at their book value, which is the cost of the asset less accumulated depreciation. Intangible assets, such as patents, are subtracted from the formula, because these assets are more difficult to value and sell. Debts payable in less than 12 months are considered shortterm debt, and those liabilities are also subtracted from the formula. The coverage ratio computes the assets available to pay debt obligations, although the liquidation value of some assets, such as real estate, may be difficult to calculate. There is no rule of thumb for what a good or poor ratio is, since calculations vary by industry.

Adjusted Underwriting Profit
Adjusted underwriting profit is profit an insurance company generates ... 
Net Interest Income
The difference between the revenue that is generated from a bank's ... 
Balance Sheet
A balance sheet reports a company's assets, liabilities and shareholders' ... 
Economic Value Of Equity  EVE
Economic value of equity is a cash flow calculation conducted ... 
Total Debt to Total Assets
Total debt to total assets is a leverage ratio that defines the ... 
Total Liabilities
Total liabilities are the aggregate of all debts an individual ...

Investing
Examples Of Asset/Liability Management
In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple. 
Investing
Debt Ratios
Learn about the debt ratio, debtequity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio. 
Retirement
The Investing Risk Of Underfunded Pension Plans
Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan. 
Investing
An Introduction to Coverage Ratios
Interest coverage ratios help determine a company's ability to pay down its debt. 
Retirement
A Primer On DefinedBenefit Pension Plans
Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up. 
Retirement
How To Evaluate Pension Risk By Analyzing Annual Costs
Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate. 
Investing
Liquidity Measurement Ratios
Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle. 
Financial Advisor
How Capital Gains Tax Works on Pension Funds
Here's why capital gains tax does not affect the assets in pension funds. 
Investing
6 Basic Financial Ratios And What They Reveal
These formulas can help you pick better stocks for your portfolio once you learn how to use them.

How do you calculate working capital?
The formula for calculating working capital is straightforward, but lends great insight into the shortterm financial health ... Read Answer >> 
What is the formula for calculating the current ratio?
Find out what makes up the current ratio, how to calculate it, and what the result can tell you about a potential investment. Read Answer >> 
How do the current ratio and quick ratio differ?
The current ratio and the quick ratio are both liquidity ratios that measure how a company's ability to pay off its shortliabilities ... Read Answer >> 
What is the formula for calculating the current ratio in Excel?
Understand the basics of the current ratio, including its use and interpretation as a financial metric and how it is calculated ... Read Answer >> 
How do fixed assets and current assets differ?
Current assets can be converted into cash in less than one year, while fixed assets are longterm physical assets. Read Answer >>