Liabilities are a common occurrence in the business world — where there are investments and assets, there’s usually also a fair amount of debt. That’s why asset liability management is crucial to properly manage your assets and liabilities in conjunction with one another and avoid major financial losses.
Asset liability management deals a lot with asset value and inventory, so it’s important to find a way to streamline these processes. Cloud-based software, such as BlueTally, is a popular solution to this — they help automate asset management workflows and improve overall efficiency.
Now let’s move on to the basics behind asset liability management.
What is Asset Liability Management?
Asset liability management is where you manage your cash flows and asset usage to ensure you pay your liabilities on time. Cash flows simply refer to the movement of money in and out of your business (i.e., inflows and outflows) whilst liabilities are debts you owe to other parties.
How are Assets and Liabilities Linked?
Assets can bring money into your company, whereas liabilities take money out — asset liability management focuses on managing these two things in a way that brings you profit. This involves scheduling cash flows to meet liability deadlines and ensuring you always have the funds (or assets) to pay them off.
Every asset you own will have a certain value, which can be exchanged for cash if need be. When managing your liabilities, it’s important to always have assets available to pay your debts. Assets can include hardware, digital inventory, or investments.
You can track and manage all your assets seamlessly using BlueTally, a cloud-based asset management software:
With BlueTally, you can document details about each of your assets and easily monitor their location to avoid loss of inventory. You can also view auto-generated depreciation reports to keep a constant eye on your asset value:
Why is Asset Liability Management Important?
Improved Debt Management
Effective asset liability management can improve your cash flow management — you can plan debt repayments in advance and ensure you always have the relevant assets to pay them off.
This doesn’t only involve timing your payments properly — you also have to consider which assets should be converted into cash and whether they’ll be converted in time to meet repayment deadlines. Create an asset register detailing information about your equipment to keep track of their condition and value.
Reduced Present and Potential Risks
Managing your assets and liabilities efficiently means reducing the chances of losing money. You can identify current or potential risks on your balance sheet and make plans to reduce the risks involved.
Maximized Investment Returns
You can strategically allocate assets to specific liabilities and create opportunities for financial gain. For every repayment, you can ensure there’s a surplus left over from your investment and maximize your returns. Allocate assets using your asset management system so you never lose track of the asset-liability pairings.
How to Implement Effective Asset Liability Management
1. Complete an Asset Inventory
Before you can start managing your assets, you need a record of all the assets you have. Do an inventory check and make note of any relevant details, such as:
- The total amount of assets you have
- Their respective locations
- Their year of release and how you came to possess them
- Their life expectancy and whether they require maintenance
- Their market value
Just click the ‘new’ button and fill in the following information (if applicable):
- Asset ID & Status (e.g., being repaired, archived, broken, etc.)
- Product (select an existing asset on the register or add a new one)
- Asset Name & Serial Number
- Warranty Expiration Date
- Order Number, Purchase Date & Cost
If you already have a register of all your assets, do a quick audit to ensure your information is still accurate. Use the ‘bulk edit’ tool to swiftly update your register if necessary.
Other Useful Features
Asset Barcodes: Assign each asset its own unique barcode for easy tracking. Print them out and attach them to the right assets — this way, you just have to scan them to get all the information you need, including their location and value.
Asset Audit & Maintenances: Schedule audits or maintenance for your assets and get notified when they’re overdue to stay on top of things.
2. Calculate Life-Cycle Costs
Next, in order to get a clearer sense of your finances, calculate how much it costs to maintain each asset in its entire life cycle. This includes the cost for:
- Acquisition or Initial Purchase
- Maintenance (repairs, upgrades, etc.)
- Generated Revenue or Capital
An asset’s life cycle refers to its operating life and should end when it stops being used by the company (or during asset disposal). Try to be accurate when determining life-cycle costs since it helps you decide an asset’s worth and whether it’s suitable for liability repayments.
3. Conduct a Gap Analysis Between Assets and Liabilities
In order to use your funds to their full potential, you should perform a gap analysis to identify possible liability risks and assess current asset value. You can use the results to determine whether you’re on track with your goals.
Gap analysis refers to measuring the disparity between rate-sensitive assets, such as loans, and rate-sensitive liabilities. These are affected by interest rates, with their value rising or dipping as rates change.
A gap analysis allows you to assess IRR (interest rate risks) over a certain period of time, along with liability risks (situations where you’re held responsible for financial loss). You can also calculate the current market value of your assets (aka asset valuation), which should occur prior to insuring an asset.
How to do a Gap Analysis
Here are the basic steps to a gap analysis:
- Identify asset management goals
- Determine the interest rate gap between assets and liabilities
- Assess the gap data
- Create a gap report
This can help you plan against potential risks and better utilize your assets.
4. Predict Depreciation Rate, Asset Disposal, and Associated Risks
Now we’re onto predicting asset depreciation, which BlueTally automatically calculates for you:
You can also view ‘end of life’ reports to get a sense of their life cycle or disposal rate:
If you wish to create your own predictions, here are some questions to get you started:
- Are asset life cycles assessed regularly?
- How accurate were the previous depreciation estimates?
- How much does depreciation affect asset value?
- What are the expected end dates for your assets?
- Are financial gains or losses from asset disposals recorded in your balance statement?
5. Apply Cost-Effective Management
Now that you’ve gone through most of the basic steps, it’s time to implement some cost-effective management strategies to optimize your investment returns. For example, proactive strategies often perform better than reactive ones. This means planning things in advance, such as regular maintenance work, to avoid big technical failures instead of waiting for something to happen.
Proactive management is usually more cost-effective — you’re doing many little things over time as opposed to one big thing when something bad occurs. The latter can also be quite costly since they cause larger disruptions. For example, if you wait until a piece of equipment fails to act, it will take longer to get it working again.
6. Automate Processes and Workflows
Finally, to streamline the asset liability management process, you should invest in asset management software like BlueTally. We help automate several workflows, such as depreciation reports and inventory updates. Automating all these time-consuming tasks can greatly increase your efficiency, leaving more time for other activities.
The best asset management software should:
- Help you prolong asset life cycles
- Streamline maintenance and audits
- Aids you in meeting consumer demands
- Tracks your assets efficiently
- Improve risk management
With BlueTally, you can auto-generate depreciation reports, ‘end of life’ reports, and even custom asset reports, which are available for download:
Our dashboard gives you a quick overview of upcoming or overdue events and recent activities for easy monitoring:
You can also view your total asset value and asset utilization to get a quick glimpse of your finances and how effectively you’re using your assets:
At the bottom of the dashboard, there are pie charts displaying your current asset statuses and categories — this helps you quickly identify which assets are available, along with what type of asset dominates your collection.
Asset liability management is crucial to managing cash flows and reducing financial risks. While this process has many aspects, it mainly focuses on timing debt repayments and allocating the right assets for the job. Your assets must be in order for this to proceed smoothly, which is where asset management tools, such as BlueTally, come in.
Here at BlueTally, we allow you to ditch your spreadsheets in favor of a more simple asset management system. Start automating your workflows today by signing up for our free plan, or check out our demo to get a closer look at our features.