Is Xero inventory management fit for D2C manufacturers?

Xero inventory management is not designed for direct-to-consumer manufacturers to track raw materials and inventory. Discover the solution to this problem.

Female sweet maker weighing sweets for packaging.
Last updated: 02.05.2022

It completely makes sense to get set up on Xero inventory management. Software that helps you manage your products and sort out those intimidating finances? What’s not to love! Unfortunately, Xero hasn’t been optimized for manufacturers. So, we’ve looked into how manufacturers can make the most out of it and how they can bridge the feature gaps.

Managing a growing manufacturing business is no small feat.

Nowadays the pressure and responsibilities that you bear are much greater than they were only ten years ago. And that’s largely due to manufacturers cutting out the middleman and going direct to consumers themselves.

Of course, there are plenty of advantages to this approach, as you gain the opportunity to talk directly to customers and increase profit margins.

But again, those increased responsibilities don’t go away.

Accounting, inventory management, scheduling production and not to mention the day to day administration of the business.

It’s why many businesses turn to Xero inventory management so that they can keep track of accounting and inventory at the same time.

Getting more control over your inventory. Xero manufacturers use Katana to bridge the gap between accounting, inventory, and manufacturing. Integrate your favorite platforms with a 14-day free trial.   

Is Xero the best for manufacturers?

Well, on the surface, yes. But scratch a bit deeper, and you’ll quickly find Xero, was not made for manufacturing.

It’s a brilliant piece of software for tracking your finances and accounts. Especially with its complex accounting features and reporting capabilities.

However, there is no dedicated manufacturing module, and the problems extend to tracking inventory in Xero too.

We’re going to dive into the reasons why this is the case and explore how inventory management in Xero works.

But of course, if you already know how it works and you only want the solutions for your growing manufacturing business then, feel free to skip ahead.

Does Xero Have Inventory Management?

The short answer is yes.

But a longer answer is more like yes, though there are limitations for manufacturers.

That’s because you can technically monitor inventory on Xero in two simplistic ways.

  1. Tracked inventory
  2. Untracked inventory

You can make an item part of tracked inventory simply by ticking the “I track this item” checkbox you see in the image above. That’s how you can begin to use Xero inventory management.

So, untracked inventory is basically a list of all the products or materials you hold, and you can include price, notes, and tax rate.

However, it does not actually track the quantity of these items, nor update them on your assets account.

Tracked inventory, on the other hand, does have the capability to update the quantity of your stock.

And of course, that’s the first jumping-off point for your inventory management.

Beyond that, Xero also gives you a very basic reporting system for your inventory.

It will allow you to track costs, profit margins, and what’s selling well.

All well and good, but how does it track your inventory accounts-wise?

PRO TIP: As you’re probably already realizing, managing your inventory in Xero isn’t ideal, and managing production is out of the question. That’s why it’s important to find Xero inventory management software that can give you the manufacturing modules that you’re currently lacking.

Accounts and inventory management in Xero

Coffee maker on shop floor checking Katana inventory management platform on a laptop.

Managing your accounts is incredibly simple on Xero, especially considering your data is constantly updated. This is why you want to find software that is compatible with Xero inventory management that also works in real-time.

To set up your Xero inventory management system, you need to follow a few basic steps.

The first is to set up two new accounts in your “Chart of Accounts”.

  1. Inventory asset account
  2. Costs of goods sold account

Now your inventory asset account is created so that you can use the “Tracked Inventory” function and monitor the quantities of your materials and finished goods.

Your cost of goods sold will, of course, be tracked in your “COGS account”. This way you also have some idea of how much production for each inventory item costs.

After this basic setup, you can start to generate bills and invoices in accordance with your sales and purchases of inventory.

So, if you sell an item, you can create an invoice for the company you are selling to, and the quantity you enter will automatically be adjusted in your “Inventory Asset account”.

In the same way, if you make a purchase, you can create a bill which will then adjust the quantity of stock for you.

And that’s the basic gist of how Xero and inventory management come together.

Now you might be thinking, that all sounds well and good. But is that it?

Is that as far as Xero goes for inventory management?

Well, the answer is pretty much yes.

This is why manufacturers tend to find a Xero inventory management add-on as soon as the opportunity arises.

Because the reality is that dealing with materials and finished goods in the context of production is a little more complex than a basic inventory account.

You’re going to need material requirements planning software to track manufacturing costs, product recipes, and raw material inventory management just to name a few. This is where Xero isn’t going to cut it for you.

Looking to manage orders through Xero? Check out our article on Xero order management to take control of your orders.

PRO TIP: If you are a manufacturer selling on Shopify, we’ve got you covered. Learn how to optimize production with integrated Shopify manufacturing software, maximize your sales with multiple Shopify stores, and find out the best Shopify tools to take your business to the next level.

Limitations of Xero inventory management for manufacturers

Glasses manufacturer updating Xero inventory management on laptop after making a new pair of glasses.

Growing manufacturers like the guys at “Framed by Karl” are constantly in the process of exhausting materials for various products and recipes. This is one of those areas which requires more advanced features than what Xero inventory management offers.

We’d all love to find ourselves with a one size fits all software that does everything for us.

However, the reality is that this is rarely the case. Unless you’re willing to spend upwards of $75000 on a custom-made ERP system.

It’s one of the reasons though that many manufacturers turn to Xero in the first place. The idea of being able to manage the entirety of your manufacturing business plus its finances in one place is awesome.

Unfortunately, that’s not the case, and as brilliant as Xero is for your accounting, it’s not so great when it comes to inventory management as a manufacturer.

After all, that’s not what it was built for.

This is why manufacturers using Xero often also use Xero inventory management apps for support.

Here are a few of the limitations which most affect growing manufacturers on Xero.

1. No raw material management 

Well, this one is huge.

Xero does not track help you track raw materials or the conversion of those materials into products based on the product’s recipe.

Ideally, you need a system that will automatically adjust your material inventory whenever materials are allocated to manufacturing or sales orders.

Otherwise, aside from the pain of manually inputting every order, you will have no idea of how much material you have at any given moment, nor will you know when to purchase more.

2. No product recipes 

The essence of production is about putting components together to build a final, finished product. But, how can you do that without product recipes (bill of materials) to use as the foundation of your production?

Xero does not provide you with a function to track these, so you are already at a disadvantage here.

3. No automatic calculation for cost of sales 

There is no function in Xero inventory management that is going to calculate the updated raw material costs for each of your sales or manufacturing orders.

This means that your total manufacturing costs are going to be out of date at best and inaccurate at worst.

There are a few workarounds for this, but the amount of manual work you will have to put into using Xero inventory management makes it extremely time-consuming.

Xero inventory management apps, on the other hand, are designed to do these calculations automatically.

4. No production scheduling 

There is no master production schedule feature on Xero, nor any way to track your production tasks at all. This means your inventory is going to be in use without a link to your floor-level processes.

Plus, your production planning will have to be done entirely manually, which is time-consuming and makes you more prone to human error.

5. No bulk inventory adjustments 

We know that even if you are using perpetual inventory, and constantly tracking stock, that it is still important to do a good old-fashioned physical stock take regularly.

The problem with Xero is that there is no way you can do a big bulk edit of your current stock levels to adjust them. If you wanted to do a physical stock take, your work would be doubled as you then have to go and update each item individually on Xero.

PRO TIP: Do you use QuickBooks for your accounting instead? Fear not, as Katana can integrate with QuickBooks too, be sure to check out the Katana x QuickBooks integration.

Integrating Xero with ERP manufacturing software

Simplified version of sales fulfillment platform within Katana manufacturing ERP.

Katana smart manufacturing software integrates with your Xero accounts so that you can streamline your inventory, production sales, and accounting. It basically means you can use the dedicated manufacturing tools of Katana to optimize your business, instead of relying on Xero inventory management which isn’t designed for manufacturers.

It’s not difficult to see why manufacturers seek to find inventory management software compatible with Xero.

After all, there are just far too many elements of both inventory management and manufacturing missing. Not that it’s any sign of a flaw on Xero’s part.

Xero is primarily an accounting software, and that’s where it shines. The inventory management feature will work fine for basic resellers or businesses which are not focused on production.

However, for the rest, there is Smart Manufacturing Software.

Katana Smart Manufacturing Software is an all-in-one solution for growing manufacturers looking to streamline inventory, production, and sales.

It’s easy to set up and has been designed so that you can manage your manufacturing business from one place.

And the brilliant thing is that it integrates with Xero, so you can centralize your business operations and finances onto one, easy to read, dashboard.

Once you allow the connection, you can go ahead and edit:

  • How Katana will send invoices and bills to Xero
  • To which Xero account you’ll be sending your product income and material expense
  • Your Katana and Xero tax types

Finally, before selecting Done when connecting, you can specify if you wish to import your customer and supplier information from Xero to Katana.

The purpose of Katana synchronizing with your Xero account is to avoid wasting time jumping between software manually updating your finances and to bridge the gap Xero lacks with manufacturing features.

Be sure to check out the video below to get a better understanding of how Xero inventory management works with Katana:

Katana + Xero — the ultimate combination for manufacturers

Katana's Xero manufacturing software helps you easily integrate your accounting, inventory, production, and sales. Find out how.

However, if you make customized goods or negotiate prices, you can use our integration with Xero to import sales orders exactly when you need them to begin production.

With the Katana and Xero integration, you can get back to focusing on growing your business.

Now, Katana provides a lot more for growing manufacturers than just that.

Here are a few key benefits on offer:

  1. Manufacturing inventory management and material inventory
  2. On-demand access to your manufacturing costs
  3. Production scheduling software functionality
  4. Integrate and sync your other business tools
  5. Floor-level control for manufacturing
  6. Efficient material purchasing plans
  7. A way to keep your entire business workflow on a single platform

Just to be clear though here, we are not talking about replacing Xero, far from it.

Xero is a brilliant software for your accounting and finance purposes, saving you plenty of time there.

But those are exactly the areas you should use it for.

Xero inventory management, on the other hand, is only really useful for businesses that are not focused on managing raw material. Manufacturers will certainly need more for their business to run smoothly.

Raw material management, production scheduling, and tracking manufacturing costs are not areas to be taken lightly.

Instead, integrating with Smart Manufacturing Software gives you the space to use tools for what they are designed for.

You wouldn’t use a hammer to peel your apples, after all!

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