What is the impact of an improved cash flow on liquidity?

An improved cash flow enhances a company's ability to meet its short-term liabilities because it increases the available cash that a company has on hand. When cash flow is strong, it indicates that the company is generating more cash from its operations than it is spending. This additional cash can be used to pay off debts, cover operational expenses, and handle any unexpected financial obligations that may arise.

Liquidity is fundamentally the measure of how easily a company can access cash to meet its short-term commitments. Therefore, improved cash flow directly contributes to a better liquidity position. Companies with robust cash flow are better equipped to respond quickly to financial needs and opportunities, which is critical for maintaining operational stability and investor confidence.

In contrast, the other options do not align with the relationship between cash flow and liquidity. For instance, suggesting that improved cash flow has no effect on liquidity overlooks the essential function that cash plays in meeting obligations. Similarly, the idea that it would decrease liquidity contradicts the foundational principles of financial management, as higher cash flow supports stronger liquidity positions. Lastly, claiming that cash flow only affects long-term investments ignores the immediate impact on short-term financial health and operational capabilities.