Xero Raw Materials: How Manufacturers Can Track Them Right Now
The big question on everybody's lips, is it possible to track Xero raw materials? We look into the limitations of using Xero for raw material inventory management, the workaround for tracking materials in Xero, and why it’s important to use third-party integrations.
Does Xero Track Raw Materials?
The simple answer is no, you can’t use Xero for tracking raw materials or your work-in-progress (WIP manufacturing). You can only track the inventory that is bought and sold as a finished product.
However, there are a few workarounds to track raw materials with Xero, but these will be ineffective if your business needs advanced inventory tracking for:
— High volumes of raw materials and items;
— Using bespoke manufacturing; and
— Monitoring the progress of your production.
Straight from the horse's mouth, if you need advanced inventory features and tracking raw materials with Xero, a specialized app will be more suitable.
But, don’t panic, as there’s already more than enough panic in the world nowadays.
We’re here to bring calm and raise awareness for finding a solution to tracking your Xero raw materials.
If you’re well underway to using Xero, we’d recommend skipping to the “Why Use Third-Party Xero Raw Materials Management Solutions?” chapter.
Otherwise, let’s quickly bring you up to speed with tracking raw material in accounting software.
Xero is a fabulous piece of tool built specifically to help you manage your business's bookkeeping.
It also comes with basic inventory management features, though these have been catered more to retailers or drop shippers.
And unfortunately for direct-to-consumer (D2C) manufacturers, it doesn’t support manufacturing or accounting entry raw material consumption (at least not directly, anyway).
Though it’s not all doom and gloom for us manufacturers, as Xero helps you easily save information from previous transactions such as:
— Default price;
— Account information;
— Tax rates; and
— Description details.
Helping you create a personalized item list that will auto-fill future transaction fields, and easily track your cost of goods sold (COGS).
So, don’t wash your hands of Xero if you think you need it to do more for your manufacturing business.
We're going to look further into does Xero track raw materials, the limitations, the workarounds, and how you can implement third-party tools to bridge the manufacturing gap.
PRO TIP: Perhaps you’re just fine and dandy with how you manage your Xero raw materials, but only want to optimize your inventory keeping. Feel free to take advantage of our free inventory spreadsheet template to get more control over your business.
So, without further ado, let’s begin!
The Limitations of Xero Raw Materials Tracking?
You might be scratching your head, “uh, didn’t I just read that the answer to does Xero track raw materials is a firm no?”
That answer still stands correct. You're technically not able to.
But, as we mentioned earlier, there are ways to get around the missing features for accounting entry raw material consumption.
Though, before we investigate how you can (kind-of) use Xero raw materials tracking, we should explore the limitations beforehand.
As already discussed, the Xero inventory management feature only supports those who’re tracking inventory levels of finished goods.
You can track other products and Xero raw materials under Untracked Inventory, the only issue with this is:
— You can’t track the quantity of these items; and
— You can’t update these items on your assets account.
Not only that, but manufacturers also need to be able to track their production, along with storing valuable data about the products they manufacture.
We’re not just missing out on Xero raw materials here, but Xero is lacking a bill of materials (BOMs) feature that helps you store the essential blueprints for making your products, which will also be necessary for tracking the manufacturing costs of your products.
This also highlights the next cause for concern.
Without BOMs or tracking raw material in accounting, the cost of sales will be out of whack as Xero will be unable to account for these costs.
These are just a few of the limitations to Xero raw materials tracking you’ll need to overcome. However, if you do decide to tough it out, next we’ll take a look at the workaround you can follow to make accounting entry raw material consumption, a little easier.
PRO TIP: Intimidated about using a workaround? Don’t get cold feet! Check the different inventory management software out there, which can integrate with Xero and give you those manufacturing features you need.
The Workaround for Tracking Xero Raw Material in Accounting
Even though there isn’t an actual feature for tracking consumption of your Xero raw materials, there is technically a way you can do it, and even build a pretty basic BOM.
However, this approach is only realistically usable for those who assemble to order (ATO).
And even then, the costs to assemble products will fluctuate which Xero, without third-party assistance, won’t be able to automatically compensate for.
Either way, to start accounting entry raw material consumption, instead of tracking your finished goods, you buy in raw materials and track the quantities and values of those materials.
Essentially your inventory should be:
Tracked Inventory – Xero raw materials; and
Untracked inventory – Your finished goods.
You’ll be able to see how many finished goods you have sold, but it never shows up on your stock on hand reports.
So, you’ll start by inputting your Xero raw materials or sub-assemblies, with their prices and quantities:
— Bicycle Frame – QTY 6 at $100 each;
— Bicycle Gears – QTY 6 at $122 each; and
— Bicycle Wheel – QTY 12 at $149 each.
These expenses will go directly to your balance sheet under “Inventory”.
Once you sell a finished product (in this instance, a bicycle), the sale will appear in your “Profit and Loss”, but the “Cost of Sales” will be missing.
To process the cost of sales, you’ll need to make a production invoice to recognize the use of the Xero raw materials.
This setup will allow Xero to calculate the average cost of your inventory, even if you buy materials at different prices. However, you will manually need to perform the cost of sales after each sale.
If you want to better understand how to implement this workaround, be sure to check out how does Xero track raw materials down below:
The Problems with Using Xero Raw Materials Tracking
As you can see for yourself, a workaround for Xero raw materials is possible, but not ideal. Plus, there are still other issues that you’ll need to overcome, such as:
1. No WIP Tracking
You’re unable to track your manufacturing costs or your work-in-progress automatically. This means you cannot update your accounts until the items are built and dispatched to the customer.
2. Doesn’t Support Make to Stock (MTS)
The workaround only supports MTO and ATO workflows, meaning that you’re going to have to find or develop another method for if you follow an MTS workflow.
Additionally, 33% of modern manufacturers use a combination of MTO and MTS. And when it comes to does Xero track raw materials, it’s unable to support this flexibility.
3. No Multi-Level BOMs
As you’ve already seen, it is possible to have a form of BOMs saved on the software, and you’ll even be able to perform Xero raw material tracking. But this is all well and dandy if you’re only making products that don’t require complicated BOMs.
Managing raw material in accounting means you’re sacrificing features such a multi-level BOMs, which are necessary for manufacturers who’re tracking a complicated and diverse inventory.
4. Drains Resources
Using the workaround for Xero raw material tracking still requires you to manually update inventory (and cost of sales). Meaning you may as well use inefficient Excel spreadsheets to maintain your business, as you’ll need to dedicate time for updating these transactions.
5. No Production Planning or Scheduling
It’s one thing to ask does Xero track raw materials? But, can you plan and schedule your production with Xero? You’ll need to find another tool for managing production and running your business.
This will take up even more of the resources that you could use to manufacture your products and grow your business.
It might seem like all we’re doing is throwing shade toward Xero. We’re not, Xero is a fantastic tool for managing your finances and you made (or are making) a wise decision by getting set up with it.
But ultimately, if you’re a manufacturer using it, there are still other features that your business will need, and this is why Xero encourages users to check out the Xero Appstore.
Why Use Third-Party Tools for Managing Xero Raw Materials?
Once again, Xero is great for managing your finances, but for managing raw material in accounting, it needs a little helping hand.
Many manufacturers, giving that we’re currently experiencing industry 4.0 and a worldwide pandemic, have switched to a D2C business model, meaning they’re using a multiple channel selling tactic, managing their manufacturing, and doing their accounting for themselves.
This new way of working has become the winning formula for D2C manufacturers:
E-Commerce Platform + Smart Manufacturing Software + Accounting Tool = Success
This combination allows you to create synergy between all your tools, so you can have a smooth and automated manufacturing process that will help you achieve lean manufacturing and optimize your business.
But, be sure to find a tool that can integrate with your accounting to truly give you the full power of Xero raw materials management.
PRO TIP: Getting set up with the right tools is one thing, but you’ll still need to learn about the different techniques you can implement to improve your inventory management.
Katana Smart Manufacturing Software for Xero
Katana allows you to embrace the power of smart manufacturing, by integrating your Xero account to Smart Manufacturing Software, which lets you centralize your entire business onto one ridiculously easy to understand, visual dashboard.
With Katana, you can handle all your sales and manufacturing. And once you’ve made a sale or you've purchased materials, you can generate your bills and invoices, and push them straight to your Xero account to keep track of your finances.
Not only will it give you Xero raw materials management, but Katana will bridge the feature gaps for:
Real-time Autonomous Inventory Tracking
With Xero, especially using the workaround, you’re not going to have an accurate representation of inventory levels, and you’ll need to perform physical stocktakes more often than you’d perhaps like to.
Katana has an auto-booking system, that tracks your finished goods and Xero raw materials level, in real-time, so you know exactly what your stock levels are, and what you need to do next.
Not only that, but the auto-booking system takes your finished goods and Xero raw materials, and automatically allocates them to your open orders, which will improve your order fulfillment rate since you’ll know immediately if you have the inventory to fulfill your orders on time.
Automatic Production Scheduling
There’s nothing worse than sweating over getting your production schedule finished, only to have something come up, stop production, and force you to redesign the schedule.
When you generate a manufacturing order, Katana automatically schedules production for you. However, if for some reason, you need to change your workflow, perhaps for a VIP customer, Katana’s nifty drag-and-drop system allows you to easily do so.
On top of this, the auto-booking engine will also redistribute your finished goods and Xero raw materials, so you can stay focused on the shop floor.
If you’re a manufacturer who requires a beefier system than what can be offered with the Xero raw materials workaround, then you’ve come to the right place.
Katana allows you to save your BOMs and even create sub-assemblies if you need them, which will help Katana automatically calculate your manufacturing costs and inform the auto-booking system how to distribute your Xero raw materials to manufacturing orders.
The best part is, if you make different variants of a product, Katana will help you generate each possible variation when you’re setting up your BOMs, saving you a lot of time and hassle.
If you want to learn more about how the Katana X Xero integration works, be sure to check out the video below:
So, there you have it, now you’re aware of the limitations when looking into does Xero track raw materials, and the steps you can take to overcome these limitations (be that by using the workaround or taking advantage of third-party Smart Manufacturing Software).
If you do decide to look into third-party software for Xero raw materials, be sure to check out reputable comparison sites, such as Capterra, who have even put together their top 20 MRP software list, perfect for manufacturers looking to integrate manufacturing tools with their Xero account.
Just be sure to find a tool that you can experiment with and request demos, as you don’t want to commit resources into implementing a tool, only to realize that it’s not the best fit.
Why not take Katana for a spin around your shop floor? We offer a 14-day free trial, so you can see for yourself how it will give you total control over your Xero raw materials.
And that’s it for today! We hope that you found this article useful, and if you have any questions, please feel free to get in touch with us down below or over on our social media pages.
And until next time, happy manufacturing.