E-commerce accounting: How to use Xero for inventory management
Kaci Carson
November 09, 2023
As an e-commerce store owner, you’re aware of the impact proper e-commerce inventory management has on your finances, COGS, among other areas. Xero is an accessible accounting software that helps business owners to gain control and share insights across their business. Through using accounting software, such as Xero, e-commerce business owners can have a clear picture of inventory and accounts in real-time to guide smart decisions that drive profitability.
Using apps (or plugins) for inventory management
With the addition of apps for inventory management, you’re able to streamline your processes, eliminate waste, and receive invaluable insights on your product flow. Consider integrating your e-commerce store with an inventory management software to stay on top of your stock levels and to access in-depth reports.
An app option for your e-commerce store is Unleashed which allows for your stock level updates, and supports barcode scanning options. Unleashed is able to integrate Xero to various e-commerce platforms, such as eBay, WooCommerce, Amazon, and Shopify.
Another option is Cin7 Core (formerly known as DEAR), software that tracks inventory levels and has features for product availability notification and multi-site stock management. Cin7 Core also can integrate Xero with Square, Shopify, WooCommerce, among other e-commerce platforms. Having either of these options integrated with your e-commerce store will enhance your management of stock for the better.
Options for inventory management in Xero
Inventory is one of the most important assets for a business to monitor and control. However, the level of detail needed to manage inventory effectively differs depending on the types of products sold. Xero offers two options, tracked and untracked inventory, so businesses can choose the appropriate method to suit their needs.
You can start with an untracked solution and transition select items to tracked inventory over time as the business grows and maintains control and consistency over costs. The option to choose the appropriate method for different categories helps ensure that the processes are not only simple but also adaptable to the growing and changing nature of e-commerce store ownership.
Tracked vs. untracked inventory
Tracked inventory items allow you to set up stock quantities, costs, and track items as they move in and out of stock. You can use tracked inventory for items you sell through your e-commerce store. Tracked inventory provides maximum visibility and control, allowing businesses to minimize stockouts, efficiently reorder, and gain insights from detailed reports. This option is best suited for expensive, frequently sold items where the benefits of close management outweigh the costs.
Untracked inventory records transactions but does not monitor item quantities or costs. It minimizes the time spent managing inventory for high-volume, low-cost products. Although visibility into current stock levels is lost, the time required to track each unit is avoided. Consider this option for when there is no need to closely monitor your stock, for items that are simpler.
Inventory management methods (FIFO vs. LIFO)
When managing tracked inventory in Xero, you need to choose an inventory valuation method – either FIFO (first-in, first-out) or LIFO (last-in, first-out). Your chosen valuation method determines which items you assume are sold first when an item is removed from inventory. Your choice of FIFO vs. LIFO impacts your inventory cost and the cost of goods sold on your income statements.
FIFO assumes the first items added to inventory are the first sold. With FIFO, your balance sheet shows your inventory valued at the cost of more recent purchases. Your cost of goods sold uses the costs of the first items in inventory. The FIFO option best matches how businesses commonly sell inventory.
With the LIFO valuation method, the last items added to inventory are assumed to be the first sold. The total value of your inventory balance at the cost of your earliest purchases. The cost of goods sold uses your most recent purchase costs.
When selecting your preferred method, consider choosing one that best reflects how you sell items and one that matches your business needs. Xero allows you to choose and change your method to optimize your tax and accounting outcomes. With a good understanding of the implications of each method, you can utilize FIFO or LIFO in Xero for effective inventory management and financial processes for your business.
Inventory adjustments in Xero
Businesses may need to make adjustments to inventory for several reasons, including physical inventory counts, waste, or breakage. In Xero, you’re able to take tracked inventory items and adjust them manually, increasing or decreasing the stock quantity on hand. When making an adjustment, businesses select the reason for the change in inventory to maintain visibility in auditing records and provide an explanation in reporting.
Physical inventory counts validate the accuracy of inventory records in the system compared to actual stock on hand. If differences are found between the counts and Xero, adjustments are made to match and confirm the physical quantities. These adjustments help ensure that inventory value and costs are properly correctly and sales are fulfilled based on real product availability, having an overall positive impact on your inventory.
Adjustments for such reductions in inventory allow businesses to write off unusable or stock that is no longer being sold, to ensure that the operational and financial decisions accurately reflect the stock on hand. By identifying the reasons for lost inventory, businesses gain valuable data to analyze trends and minimize future impacts.
Adjustments may also be required for other reasons, such as transferring stock between locations or correcting an input error. Xero maintains a complete audit trail of all inventory adjustments, recording the date, value, quantity, and explanation for each change. With a history of adjustments, businesses have the information needed to verify the accuracy of inventory for reporting and address deviations that could signal problems requiring remediation. The ability to adjust inventory with an audit trail in Xero helps ensure businesses can maintaintain compliance in their inventory management. It also helps to inform strategic decisions based on accurate data.
Why integrate your e-commerce store with accounting software
Integrating your accounting software and e-commerce store is an easy to follow process. with our Guided, Advanced, and 2 Minute set up options. With our Guided set up you’re able to book a 30 minute zoom call where a customer support team member will help you get started. With the Advanced set up option you’ll go step by step to sync the integration. This option also allows for custom mapping.
Follow the steps below to get started with our 2 minute express set up option. We’re using Shopify + Xero as an example.
- To get started, Register or sign in to the Amaka dashboard.
- To begin the setup, click the New integration button and select Shopify + Xero from the list of integration options.
- Click the Connect new account button below the Shopify logo to sign in to your account. Then grant all relevant permissions, by following the guided authentication process.
- Then continue to Authenticate your Xero account through following the process of guided authentication, then click Save + Continue.
- Choose your preferred setup method, invoice breakdown, invoice format, mapping and scheduler options to successfully complete the set up.
- Finish by clicking Save + Continue to activate the integration.
Through the integration you’re able to streamline your data entry process through syncing sales and payment data between systems providing your business with both sustainable and reliable accounting support in the long term.
Key takeaways on Xero and inventory management software
Through the utilization of different inventory management methods your business will be able to implement successful inventory management processes. When this process is automated, it will result in time saved, errors reduced, and most importantly contribute to the overall efficiency of your business.