As a business advisor, your client James Romano operates a strawberry farm in the Dandenong mountains east of Melbourne and seeks your assistance in compiling monthly budgets for the 2020 financial year. He starts the year with \$400,000 in the business bank account.

Strawberries are grown in Queensland during the winter months, and in Victoria during the summer. Australian consumers can enjoy domestically grown produce all year round, even though strawberries are seasonal.

Victorian growers can harvest strawberries for eight months of the year, with the vast majority available during the summer months. James estimates the following distribution of sales:

Distribution of sales

Sep               Oct               Nov               Dec               Jan                Feb               Mar               Apr

3%                08%              15%              22%              20%              15%              11%               6%

Victorian strawberry growers naturally budget according to the Australian financial year running from July 2019 to June 2020 as winter is their quiet season.

As a strawberry farmer, James only has one product – Strawberries. The unit of sale is a “box”. Each box of strawberries contains 15 punnets, and each punnet weighs 250 grams. Although the price of strawberries can vary between \$20 to \$65 per box, James instructs you to use an average price of \$35 per box for all calculations.

While James is not a retailer/wholesaler, he nevertheless keeps track of his direct costs, and asks for help with a cost of sales budget. These costs include a) the cost of the boxes, punnets, and labels, b) the cost of contract labour to pick the strawberries and pack them into the boxes, and c) the freight to deliver the product to market. James estimates the cost of boxes is \$2.80 per unit, contract labour averages \$10 per box, and freight is \$1.25 per box. James estimates that he will sell 40,000 boxes during the 2020 financial year.

Strawberries are highly sensitive to weather conditions, and a week of good weather can lead to up to three times the average expected yield, while a bout of hot weather or hail could destroy the entire crop for two weeks.  To ensure that James always has enough boxes, punnets and labels, he will always end the month with enough stock to cover 80% next month’s sales. Boxes and freight must be paid for in cash, but contract labour for picking and packing is paid fortnightly in arrears. This means that on average, this month labour will be paid for half now, and half in the following month.  20% of strawberries are sold on the open market for a cash, with the remaining being sold on credit to two supermarkets Kolesworths and Oldies. Kolesworths is the preferred buyer since they purchase three times the volume of Oldies and Kolesworth always settles their bill within 30 days.  Oldies settle their bill two months following the sale.

James splits his expenses into “Farm Operations” (equivalent to “selling expenses”), and “General & Administrative Expenses”.

### Expenses and payments related to farm operations (selling)

Strawberry plants cannot be grown from seeds and must be replanted every year. The planting process occurs between April and July after the picking season winds down. The cost of purchasing plants and the contract labour to plant them costs \$250,000 per annum, being spread evenly over the four months.

Each month he incurs \$1,500 equipment repairs & maintenance, and \$3,500 on motor vehicles (including fuel, oil and servicing), and \$8000 depreciation on equipment.

Water, Gas & Electricity are combined into a single utility bill, which is paid quarterly. The utilities expense varies with volume of sales. Based on previous experience James provides you with the following table:

 \$ Paid during Applies to the months of 1,140 September Jul, Aug and Sep 7,220 December Oct, Nov and Dec 8,740 March Jan, Feb and Mar 1,900 June Apr, May and Jun

Last year James spend \$100,000 on general farm supplies, but prices have increased 10% this year.  He believes that the general farm supplies are spread evenly over the year. \$8,100 of insurance is Paid in May.

James has several annual costs as well. Municipal rates cost \$1,350 a paid in August.

James employs two family members as full-time staff with wages at \$4,500 per month each.  One of the family members acts as the Operations Supervisor and looks after the physical activity of farming. The other family member is hired as a General Administrator working in the office.

### Expenses and payments related to General & Administration

In addition to the office administrator, James lists the following monthly payments:

 Accounts \$ Telephone & Internet, 300 Office Supplies 110 Subscriptions 350

During August the business pays an annual accounting fee of \$1,350 to prepare and lodge the annual tax returns.  This annual contract also allows James to call the accountant and ask for advice over the phone at any time during the year.

James has scheduled the office administrator to undertake staff training. In August they will take “Introduction to Xero”, and in June they will take “Advanced Xero”.  Each short course cost \$,1500 and is paid for during the month of study.

### Other costs

In July James will purchase a new tractor costing \$100,000 for cash. As the owner of the farm, he draws \$80,000 per year, spread equally over each month. The farm also has a significant bank loan, and makes monthly payments of \$5,000, which is comprised of \$3,000 interest with the remainder being a repayment on the loan principal.

REQUIRED

You need to compile a set of operating and financial budgets. This should include:

1. a Sales budget
2. a Cost of Sales budget
3. a Purchases budget (for boxes, punnets and labels).
4. a Selling (farm operations) and General and Administrative expenses budget
5. a Cash budget, including:
• schedule of expected collections from customers
• schedule of expected payments to suppliers for direct costs this should include line items for the three main direct costs:  a) boxes punnets and labels, b) freight, and c) picking and packing labour.
6. a Budgeted Income Statement.

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