Running a retail business means juggling inventory, sales, suppliers, and customers—all while keeping your finances in order. Xero offers powerful features for retailers, from basic inventory tracking to sophisticated multi-channel sales management. This guide shows you how to set up and optimise Xero for your retail operation.
Why Retail Businesses Choose Xero
Xero has become a favourite among retailers for several reasons:
- Cloud-based access – Check your numbers from anywhere, including the shop floor
- POS integrations – Connect with popular point-of-sale systems
- Inventory tracking – Built-in stock management capabilities
- Multi-channel support – Integrate online and physical sales
- Real-time reporting – See your sales performance instantly
Setting Up Xero for Retail
1. Configure Your Chart of Accounts
Start by customising your chart of accounts for retail-specific needs:
- Revenue accounts: Create separate accounts for different product categories (e.g., "Sales - Clothing", "Sales - Accessories")
- Cost of Goods Sold (COGS): Set up accounts to track the direct costs of products sold
- Inventory asset account: Track the value of stock on hand
- Discount accounts: Record promotional discounts and markdowns
2. Set Up Tracking Categories
Xero's tracking categories are invaluable for retailers:
- Location tracking: If you have multiple stores, track sales and expenses by location
- Department tracking: Break down performance by department (e.g., Men's, Women's, Kids)
- Channel tracking: Separate online vs in-store sales
3. Configure Tax Settings
Ensure your tax rates are correctly configured:
- Standard VAT/GST rates for taxable goods
- Zero-rated categories (children's clothing in UK, for example)
- Reduced rates where applicable
Inventory Management in Xero
Xero includes built-in inventory tracking that works well for many retail operations.
Setting Up Inventory Items
For each product you sell:
- Go to Business → Products and Services
- Click New Item
- Enter the item code (SKU), name, and description
- Check I track this item to enable inventory tracking
- Set the sales price and purchase price
- Configure the relevant accounts (Sales, Purchases, Inventory)
Managing Stock Levels
Xero tracks inventory quantities automatically:
- Purchases increase stock – When you receive a bill for inventory items
- Sales decrease stock – When you create invoices for inventory items
- Manual adjustments – For stock takes, damages, or transfers
Inventory Reports
Key reports for retail inventory management:
- Inventory Item Summary: Current stock levels and values
- Inventory Item Details: Transaction history for each item
- Average Cost: Track changing cost prices over time
Point of Sale (POS) Integration
For most retailers, a dedicated POS system integrated with Xero provides the best experience.
Popular Xero-Compatible POS Systems:
- Vend (Lightspeed): Full-featured retail POS with deep Xero integration
- Square: Popular for small retailers, integrates via apps
- Shopify POS: Ideal if you also sell online via Shopify
- EPOS Now: UK-focused solution with Xero connectivity
- Lightspeed: Comprehensive retail and hospitality solution
What to Look for in a POS Integration:
- Automatic daily sales sync to Xero
- Inventory level synchronisation
- Customer data sharing
- Payment reconciliation support
- Multi-location support if needed
Multi-Channel Retail with Xero
Modern retailers often sell through multiple channels. Here's how to manage them in Xero:
E-Commerce Integration
Connect your online store to Xero:
- Shopify: Direct integration available
- WooCommerce: Various connector apps available
- BigCommerce: Native Xero integration
- Amazon/eBay: Use connector apps like A2X
Marketplace Accounting
Selling on marketplaces like Amazon or Etsy? Consider:
- Use specialist connector apps (A2X, Link My Books) for accurate accounting
- Account for marketplace fees separately
- Reconcile payouts, not individual orders
- Track by channel using tracking categories
Retail-Specific Reports
Use Xero's reporting to understand your retail performance:
Essential Retail Reports:
- Profit and Loss by Tracking Category: See performance by location or department
- Gross Profit Analysis: Understand margins across product categories
- Aged Receivables: Track outstanding customer accounts
- Aged Payables: Manage supplier payment timing
- Cash Flow: Critical for managing retail seasonality
Key Metrics to Track:
- Gross margin %: Revenue minus COGS as a percentage
- Inventory turnover: How quickly stock sells
- Sales by channel: Compare online vs in-store performance
- Average transaction value: Monitor purchasing patterns
Managing Suppliers
Retail success depends on strong supplier relationships:
Setting Up Supplier Records
- Include payment terms in supplier contacts
- Store supplier account numbers for reference
- Note minimum order quantities and lead times in the notes
Purchase Orders
Use Xero's purchase orders to:
- Formalise orders with suppliers
- Track expected deliveries
- Match receipts against orders
- Control unauthorised purchasing
Handling Returns and Refunds
Returns are a fact of retail life. In Xero:
- Credit notes: Create credit notes for customer refunds
- Inventory adjustments: Add returned items back to stock if resellable
- Write-offs: Record damaged returns appropriately
- Supplier returns: Use supplier credit notes for returned stock
Seasonal Planning
Retail is inherently seasonal. Use Xero to plan:
- Cash flow forecasting: Plan for quiet periods
- Year-over-year comparisons: Benchmark against previous seasons
- Budget vs actual: Track performance against seasonal targets
Backing Up Your Retail Data
Your retail data—sales history, customer records, inventory values—is critical to your business. Boxkite automatically backs up all your Xero data to Dropbox, ensuring you always have access to:
- Complete sales and invoice history
- Customer contact records
- Supplier information
- Inventory item details
- Financial reports and statements
Conclusion
Xero provides a solid foundation for retail accounting. By properly configuring inventory tracking, integrating with your POS system, and using tracking categories for reporting, you can gain clear visibility into your retail operation's performance.
Key takeaways for retail success with Xero:
- Customise your chart of accounts for retail-specific needs
- Use tracking categories to analyse by location, department, or channel
- Integrate your POS system for seamless sales recording
- Regularly review inventory and margin reports
- Back up your data to protect your business history
