What is the first step in the cash budgeting process?

In the cash budgeting process, the initial and crucial step is to forecast cash inflows and outflows. This involves estimating the amount of cash that will be received and spent over a specific period, typically broken down into months or quarters. Accurate forecasting lays the foundation for effective cash management, as it informs the organization of its expected liquidity position.

By projecting cash inflows, a business can anticipate the revenue it will generate from various sources, such as sales, investments, or financing activities. Likewise, forecasting cash outflows helps the business understand its obligations, including costs related to operations, payroll, and other expenditures. This clear view of expected cash flow allows businesses to identify potential shortfalls or surpluses and make informed decisions regarding cash reserves, borrowing needs, or investment opportunities.

The other options are relevant to cash management but come after the forecasting stage. Controlling expenditures and creating a cash reserve are actions taken based on the insights gained from the forecast. Analyzing past cash flows provides valuable historical data but does not constitute the first step in the budgeting process. Hence, forecasting cash inflows and outflows is essential and is rightly recognized as the starting point of creating an effective cash budget.