What might be a consequence of not managing liquidity risk effectively?

Not managing liquidity risk effectively can lead to potential insolvency issues. Liquidity risk refers to the risk that an entity may not be able to quickly obtain cash to meet its financial obligations when they come due. If a company cannot access sufficient funds at the right time, it may struggle to pay its bills, meet payroll, or fulfill other financial commitments. Over time, sustained liquidity problems can lead to the inability to meet debt obligations, resulting in insolvency—where liabilities exceed assets and the company is unable to continue its operations.

In contrast, the other options relate to aspects that may internally benefit an organization but do not directly address the severe implications of failing to manage liquidity risk. A higher asset valuation, increased operational efficiency, or enhanced market presence typically reflect positive outcomes of effective business strategies rather than the direct consequences of poor liquidity management. Thus, the focus on potential insolvency issues accurately highlights the critical risks associated with inadequate liquidity risk management.