Mismatch

We hate those days when we show up to the office, look down, and realize we’re wearing two different shoes. “What a mismatch,” we say miserably. But while we might endure a few snickers throughout the day, and maybe be extra self-conscious every time we emerge from behind our desk, mismatched shoes probably aren’t going to bankrupt a business.

But a mismatch in assets and liabilities might. Organizations work hard to make sure their liabilities are covered by their assets. In other words, they want to see a match between their debt and their ability to pay it off. This is easy to visualize when we consider something like a clothing retailer. They need to make enough money from selling their clothes to offset what they owe, like storefront rental fees, labor costs, taxes, any outstanding loans, etc.

But asset and liability matching can get a little more complicated when we’re talking about something like pension funds. How do they make sure they can invest what they need to and still pay out what they’ll owe to their clients? Or what about insurance companies: how do they know how much to charge in premiums so that they’ll be able to cover all their incident claims? The answer is “It’s complicated,” and there are people who devote their entire careers to answering those very questions. We wonder if they’d be able to help us find a matching pair of shoes.