Xero Inventory – has it closed the gap?

This week Xero released its long awaited inventory functionality. This was a significant milestone for Xero as the company had long identified inventory tracking as the missing piece of its core accounting functions and had been promising delivery for quite some time. However the roadshows in February this year established definitively that the promise was on the verge of morphing quickly into reality. Significantly also, lack of inventory functionality was the major differentiator with other cloud accounting software products such as QuickBooks Online and Saasu. Small businesses with straight forward inventory requirements using Xero either had to choose an alternative product or pay for a costly add-on where the majority of features were superfluous to requirements.

So is the functionality delivered this week enough to compare favourably with QBO and Saasu and also address the basic inventory needs of small businesses? Right now there aren’t any bells and whistles in the Xero solution, the functionality really only allows a business to track inventory held for resale and recognise cost of goods sold when the inventory is sold rather than when it is purchased. Any additional features such as re-order levels, minimum/maximum quantities may be delivered in future enhancements. This is similar to QBO but interestingly Saasu can record a lot more information on items including re-order quantity, minimum order quantity and  supplier’s part number and Saasu also supports ‘combo’ items or kitting which is missing in both Xero and QBO.

There are a couple of inventory item features that are available in QBO but not in Xero. Firstly the ability to group items together under a header item – this can be helpful where there is a long item list but the same can also be achieved by careful item numbering. The second feature available in QBO is the ability to indicate if the purchase and/or selling price is inclusive or exclusive of GST – many retail businesses only think of prices as inclusive of GST. (I know I can set this at the invoice level but it is still helpful to set it on the item.)

Xero supports the transition process to stocked items for businesses that already had their items set up. The item list can be exported to a spreadsheet, the additional fields required for inventory tracking added and then imported to update the existing items. After that the list of tracked items can be exported and the opening balance quantities and values recorded and then imported ready for processing. (Care should be taken with importing the opening balances because Xero uses average cost to calculate cost of goods sold so incorrect opening balance values will cause problems later.)

Negative Inventory – is this a good or bad feature? There are varying views on this so I am just noting that Xero does not allow negative inventory (nor does Saasu) but QBO does. If there is insufficient quantity on hand when a sales invoice is entered in Xero, it can only be saved as a draft invoice – I don’t get an option to raise a purchase order as we have in MYOB and Reckon Accounts nor am I told at that point if there is a quantity outstanding on a purchase order. Xero does clearly shows the current quantity on hand when raising a sales invoice as a pop-up which is helpful. QBO does allow for negative stock and doesn’t advise me if I am about to go into negative with that invoice.

Neither QBO nor Xero have functionality for a full stock take. I can adjust both the quantity and the value but this is on a slow item by item basis which is not suitable for a business with an extensive list of inventory items. (The import of quantities and values is only for opening balances not ongoing stock take figures.).

Another difference between QBO and Xero that most small businesses won’t notice is the costing methodology – Xero uses average costing and QBO uses first in first out. I prefer average mainly because it is easier to follow the cost of sales entries but either is acceptable.

The biggest disappointment (or even seriously missing) in the Xero solution is an Inventory Summary report to reconcile inventory to the balance sheet. There is an Item Details report in the New Reports section (which means it can’t be starred for quick access) but not only is this a detail report listing all transactions, it includes non inventoried items (untracked) so is not useable for reconciliation purposes. There are no additional selection or sort criteria on the report; I can only amend the columns that are displayed. QBO does provide an Inventory Valuation report as well as good summary and detail sales and purchases reports which is certainly an advantage. (Note – the existing Inventory Items Summary report in Xero only works for non-tracked items.)

I do like the inquiry screen when I drill down on each item as it shows quantities on hand, on order, average cost and also lists recent transactions. It is helpful having all that information in one screen.

The verdict – apart from the lack of reports, the Xero solution does compare well with QBO and should work  for a business that just needs a simple inventory within its cloud accounting software. We can expect future enhancements to expand the existing functionality although as yet there are no dates. Any business that requires more than basic tracking will need to continue to look at the add on solutions such as Unleashed or Dear but it is a promising start.