What action is crucial for managing liquidity risk?

Monitoring cash flows regularly is crucial for managing liquidity risk because it provides businesses with critical insights into their current and future cash positions. By keeping a close eye on inflows and outflows of cash, organizations can identify trends, anticipate shortfalls, and make informed decisions about timing for expenditures or financing needs. This proactive approach allows companies to ensure they have sufficient liquid assets to meet obligations as they come due, thereby mitigating the risks associated with liquidity shortages.

Other strategies like maximizing long-term investments or increasing debt levels may not directly address immediate cash flow issues and could even exacerbate liquidity problems if not managed carefully. Similarly, focusing solely on equity financing can overlook the importance of maintaining a balanced capital structure and ensuring there's adequate liquidity to support day-to-day operations.