Xero Accounting for Manufacturing – Track Inventory and Costs

Xero Accounting for Manufacturing Businesses

Running a manufacturing companies and production businesses means tracking raw materials, managing production costs, handling supplier payments, and keeping on top of tax returns. Xero accounting software handles the financial side, while specialist stock management software from the Xero App Store fills the gaps for production and stock control.

This guide covers how to use Xero for a production company in the UK, which apps to connect, and how to get the most from your accounting software setup.

Why Manufacturing Businesses Use Xero

Xero is cloud-based accounting software built for small businesses, and it works well as the financial backbone of a manufacturing operation. Here’s what it does:

• Real-time cost tracking – bank feeds and automated invoicing give you up-to-date figures on material costs, overheads, and revenue
• Supplier management – track bills from multiple raw material suppliers, manage payment terms, and monitor accounts payable
• Multi-currency – if you import raw materials or export finished goods, Xero handles foreign currency invoicing and exchange rates
• Financial reporting – monthly P&L, balance sheet, and planned vs actual reports give you and your accountant clear visibility into profitability
• tax returns – file MTD-compliant tax returns directly from Xero, including handling zero-rated exports

Inventory Management Software for Manufacturers

Xero’s built-in stock control tracks stock quantities and costs, but it’s designed for simple buy-sell businesses. Manufacturing businesses need stock management software that handles bill of materials, work-in-progress, and production workflows. The Xero App Store has several options:

Unleashed

Full inventory software with bill of materials, batch tracking, serial numbers, and multi-warehouse support. Unleashed syncs purchase orders, sales orders, and stock movements directly to Xero accounting. It’s the most popular stock management software choice for UK manufacturers using Xero.

Cin7

Inventory and order management for production companyes that also sell through multiple channels (wholesale, retail, e-commerce). Cin7 handles raw materials in and finished goods out, with connection to Xero for all monthly reporting.

Dear Inventory

Production management with bill of materials, work orders, and manufacturing tracking. Dear connects directly to Xero accounting software, keeping your financial records in sync with production activity.

Browse the Xero App Store to compare these options. All three offer free trials and direct Xero connection.

Job Costing for Manufacturing

If your manufacturing business works on custom orders or project-based production, project tracking in Xero helps you track costs per job. Assign material costs, labour hours, and overheads to specific production runs so you know exactly which jobs are profitable and which are losing money.

Xero Projects handles basic job costing natively. For more detailed production tracking – including bill of materials costing and variance analysis – use one of the stock control software apps listed above.

Tracking Cost of Goods Sold

For any manufacturing business, cost of goods sold (COGS) is the most important number on your P&L. It includes raw materials, direct labour, and production overheads. In Xero, set up your chart of accounts to separate:

• Raw materials purchased – all material inputs to production
• Direct labour – wages for production staff (use Xero payroll integration)
• Production overheads – factory rent, utilities, equipment maintenance
• Finished goods revenue – income from product sales

Your gross margin (revenue minus COGS) tells you whether production is profitable before admin and sales costs. Track this monthly in Xero’s P&L report and compare against your plan.

Payroll for Manufacturing Businesses

Manufacturing businesses often have complex payroll needs: shift patterns, overtime calculations, and potentially Construction Industry Scheme (CIS) deductions for subcontractors. Xero payroll handles standard PAYE, pension auto-enrolment, and RTI submissions to HMRC.

For larger teams or complex shift patterns, consider a dedicated payroll integration from the Xero App Store. Apps like KeyPay and Staffology handle advanced payroll scenarios and sync the results back to Xero for monthly reporting.

Managing Suppliers and Cash Flow

Manufacturing businesses typically work with many suppliers on different payment terms. Some require payment on delivery; others offer 30, 60, or 90-day credit. Xero’s Aged Payables report shows exactly what you owe and when, helping you manage cash flow without damaging supplier relationships.

For manufacturers who import materials, Xero’s multi-currency feature records purchase invoices in the supplier’s currency and handles exchange rate conversion automatically.

Use purchase orders in Xero to track what you’ve ordered before the goods arrive. When the supplier invoice comes in, convert the PO to a bill with one click.

tax for Manufacturers

Most manufactured goods sold in the UK are standard-rated at 20%. But exports outside the UK are typically zero-rated – you charge no tax on export sales but can still reclaim VAT on your UK purchases. This often results in VAT refunds for export-heavy manufacturers.

Xero handles the VAT return calculation correctly for mixed domestic and export sales. Make sure you apply the right tax rate to each invoice.

Financial Reporting and Budgeting

Key reports to help manage your manufacturing business in Xero:

• P&L by tracking category – if you manufacture different product lines, track profitability per line
• Gross margin trend – monitor monthly to catch raw material cost increases early
• Budget vs actual – set production plans and track spending against them
• Aged Payables – manage supplier payment timing to protect cash flow
• Cash flow forecast – manufacturing often involves large upfront material purchases before revenue arrives. A cash flow forecast helps you plan for this.

Worked Example: A Small Manufacturer on Xero

Manchester Metalworks is a 12-person engineering firm making custom steel components. Annual turnover is £1.2 million. They use Xero accounting software connected to Unleashed for raw material tracking. Payroll runs through Xero for all 12 employees.

Month-end reporting went from 5 days to 1 day. They see gross margin by product line using tracking categories, and purchase orders link directly to supplier invoices.

Frequently Asked Questions

Can Xero handle bill of materials?

Not natively. Use an inventory app like Unleashed from the Xero App Store for bill of materials and production costing.

Is Xero suitable for large manufacturers?

For small businesses with under 50 employees, yes. Larger operations may need dedicated ERP alongside Xero accounting software.

How JacRox Can Help Manage Your Manufacturing Accounts

We work with manufacturing businesses and small businesses across Greater Manchester, setting up Xero accounting with the right inventory integration, chart of accounts, and monthly reporting. Whether you need help choosing stock control software, configuring job costing, or managing your monthly accounts, get in touch for a free consultation.

Related guides: Inventory management in Xero | Purchase orders | Accounts payable

Our Xero accountants who understand manufacturing can help you get set up and running on Xero.