How does xero accounting software work

Xero is a cloud-based accounting software product that lets small-business owners manage their finances from anywhere and integrate with more than 1,000 apps. It’s less expensive than competitors like QuickBooks Online and doesn’t charge extra for additional users, making it an affordable option for growing businesses.

Xero Accounting

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NerdWallet rating 

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on Xero’s website



  • All plans support unlimited users.

  • All plans include basic inventory management.

  • Automated bill and receipt capture through Hubdoc.

  • No live phone support.

  • Limits on bills and invoices with the entry-level plan.

Deciding factors


$12 per month and up.

Maximum number of users


Ease of sharing with accountants

Good. You can add your accountant through email and assign them advisor permission. Xero has more than 3 million subscribers globally but is not as widely used as QuickBooks is in the U.S., so it may take more time to find an accountant who is familiar with it.


Good. Xero has three plan tiers for sole proprietors and very small businesses, growing businesses and established businesses.

Ease of use

Excellent. Xero has an intuitive flow and offers a set of recommended online courses to help get you started. Online bank feeds and suggested transaction matching make reconciling easy.

How does Xero work?

After you start a free 30-day trial of Xero, you’ll activate the account and provide details about your business. Then, you can connect your bank accounts to Xero and decide if you’ll accept electronic payments via online invoices.

When reconciling books, Xero suggests likely matches between bank statement lines and transactions entered in the software. For example, if you have an entry for an invoice of $1,000 and a recent $1,000 deposit in your bank account, it might suggest matching these two transactions. Click the “OK” icon between the two to verify the match is correct.

You can also scroll through Xero’s default chart of accounts and customize it as needed, or import an already existing chart of accounts. If you have a list of customers and suppliers, you can import that, too.


Promotional discounts may apply. Xero lets new customers sign up for a 30-day free trial to test out its features. You can add Gusto payroll to any plan for an extra $40 per month, plus $6 per month per person.





$12 per month.

  • Send quotes and up to 20 invoices.

  • Enter up to five bills.

  • Automated bill and receipt capture with Hubdoc.

  • Reconcile bank transactions and set up online bank feeds.

  • Basic inventory management.

  • Reporting.

  • Send purchase orders.


$34 per month.

All features in the Early plan, plus:

  • Unlimited invoices, quotes and bill entries.

  • Ability to bulk reconcile transactions.


$65 per month.

All features in the Growing plan, plus:

  • Works with multiple currencies.

  • Project tracking tools for recording time and breaking down job costs.

  • Claim expenses.

  • Advanced analytics tools for predicting future cash flow, up to 90 days ahead.


Unlimited users

With Xero, you can add an unlimited number of users to your account at each subscription level. This is a notable feature for accounting software; often, lower-tier plans allow fewer users while only higher-tier plans allow unlimited users.

You can also set permission levels for each user. For example, you can give all employees the ability to send quotes and invoices, allow some to pay bills and limit who can see the company’s complete financial picture. To keep things organized, Xero logs every action users make and compiles the history of every transaction.

Customizable reports and dashboards

Xero helps transform the data you enter into actionable information at every subscription level. A dashboard provides a summary of your business’s financial health, including total cash in and out, outstanding invoices and overdue bills. Another page dedicated to short-term cash flow charts out how future bills and invoices can affect your bank balance over the next week.

Reports also are customizable, with adjustable formatting and the option to add your own formulas and groupings. For instance, you can drag and drop certain expense categories into a single subgroup — an “office expenses” subgroup could include office equipment, supplies and utilities. And if you don’t like how the dashboard looks, you can reorganize panels and hide the ones that aren’t useful.

Inventory management in all plans

Unlike QuickBooks Online, which includes inventory management in its $80-per-month Plus plan and up only, Xero offers basic inventory tracking in all plans. Businesses that need to keep count of items can do it within Xero, instead of integrating with (and paying for) a third-party inventory tracking app.

Xero Accounting

Start a 30 day free trial!


NerdWallet rating 

NerdWallet’s ratings are determined by our editorial team. The scoring formulas take into account multiple data points for each financial product and service.

Shop Now

on Xero’s website


No phone support

Xero doesn’t provide a phone number on its customer support page. This is a serious drawback if you want to be able to pick up the phone and talk through an issue or are new to accounting software and have lots of questions.

Instead, the company provides 24/7 online support and will call customers if it’s necessary.

Limits on bills and invoices in the entry-level plan

In the Early plan, the least expensive subscription, you can send up to 20 invoices and schedule up to five bill payments only. That can be limiting, even for freelancers and sole proprietors. For unlimited invoicing and bill-paying capacity, you’ll need to upgrade to the Growing plan.

Xero alternatives

Bookkeeping and accounting software



$15 per month and up.

FreshBooks offers unlimited time-tracking in its lowest-tier Lite plan, whereas Xero users would have to opt into the highest-tier Established plan for that feature.

QuickBooksQuickBooks Online

$25 per month and up.

As the industry standard, QuickBooks Online is ideal if you have a growing business with specific accounting needs — as long as you don’t mind taking the time to learn the program’s ins and outs. Like Xero, it can easily scale with your business.

SageSage 50cloud

$47.25 per month (when paid annually) and up.

Sage 50cloud’s Cash Flow Manager tool is a helpful feature for people who want to better understand how future transactions could impact their business. The tool also lets you adjust the time frame to see how your business has changed over time.

Wave Financial

Free (add-ons available).

Wave is a solid choice for small businesses looking for free accounting software.

ZohoZoho Books

Free and up.

Zoho Books’ paid plans all come with free live chat and phone support. The free plan comes with email support only.

Xero is an online accounting software designed for small businesses. If you’re new to Xero, then this guide to getting started should help you quickly get up and running.

Here are 13 steps to get you started using Xero to get a better handle on your finances.

1.Watch the ‘Xero Dashboard’ video

The first step to learning how Xero works is to watch the ‘Xero Dashboard’ video, which can be found in the top left corner of your Xero dashboard. 

2. Set up your organisation details

If you have a limited company, ensure that you have a registration number and registered office address. This information needs to be displayed on any invoices you issue.

Go to Settings > Organisation Settings to input or update your business’s contact details, including:

  • Display name

  • Legal / Trading name

  • Email

  • Registration Number

  • Organisation Description

  • Physical address

  • Registered address

  • Organisation type

  • Phone and fax numbers

  • Logo

  • Website

3. Set up your financial settings

Go to Settings > Advanced settings > Financial Settings to enter your company details:

  • Financial year end: this will ensure you to have the right year-end for your reports

  • Sales Tax / VAT Details: VAT scheme (flat, cash or accrual rate), VAT number and VAT period

4. Add your company’s branding

Next, you can set up your invoices with terms of payment, contract, and logo. To set up various branding schemes, go to Settings > Invoice Settings

Nailing down your terms of payment can help you to improve your cash flow. Having shorter payment terms can help you to get paid earlier.

5. Set up your chart of accounts

If you are switching from another accounting software, then you can import your chart of accounts into Xero, or modify the default chart of accounts.

If you have an accountant, you can seek their help with this decision. However, if you are your own bookkeeper then we recommend using Xero’s default chart of accounts. You can add, customise, or delete these accounts to match the needs of your business.

To make changes to your accounts, go to Accounting > Chart of Accounts. For more information on customising your chart of accounts, click here.

6. Set up your bank account feed

The next step is to set up your bank account feeds, including credit card and PayPal accounts, if you have them. This video shows you how to do that:

7. Reconcile often

Xero makes bank reconciliation easier than ever. Just a few minutes a week spent approving pre-matched items ensures your data is up to date. As Xero is connected to your bank, transactions are pulled through automatically. Xero remembers the last time you categorised a transaction, so you can simply click ‘OK’ if you want it to go to the same category.

You should reconcile weekly, if not daily, to ensure that your accounts are as accurate as possible.

Regularly updated invoices give you a clearer picture of cash flow. With a clear picture of your cash comes the ability to make better business decisions and avoid falling behind on outstanding payments.

Another benefit of regular reconciliation is that you’ll be able to use Xero add-on apps much more easily, as your data will be up-to-date.

Watch this video to find out more about Xero bank reconciliation:

8. Set up payroll

Xero Payroll can help you to monitor your staff costs. This function allows you to keep payroll costs in one place rather than having to pull in information from a separate system.

The payroll overview is a comprehensive guide to take you through each step of the setup.

If you are transferring payroll from another system in the middle of the financial year – don’t forget to add the opening balances.

This can be found at Payroll > Payroll Overview

how to use xero

9. Add payment services

You also need to link to any active payment services to your Xero account. These may include services like PayPal, Stripe, or GoCardless. With a larger variety of payment options, it is easier for customers to pay you.

This help video shows you how to set up a payment service that will allow you to create a ‘Pay Now’ button on your invoices:

To do this, go to Settings > Invoice Settings > Payment Services

10. Set up payment reminders

Getting paid quickly is crucial to any business. Setting up payment reminders and organising your credit control systems can help you to get paid faster.

Go to Settings > Invoice Settings > Invoice Reminders

Only set up payment reminders when you get into the habit of reconciling receipts daily. Chasing payment from customers that have already paid can tarnish your reputation. You can come back to this step once daily reconciliation is part of your routine.

11. Add users

You can add users at Settings > Users. Add your accountant, bookkeeper, and other necessary stakeholders. This video can show you the roles that can be assigned to your users:

You can find more information on users here:

12. Learn basic reports

It’s important to learn how basic Xero reports work. Initially, when you’ve input some data, look at your Balance Sheet, Profit And Loss, Aged Receivables, and Aged Payables.

Go to Accounting > Reports to see the options available to you.

13. Connect apps

Using Xero’s wide range of apps and add ons is a great way to streamline repetitive processes and save yourself some time.

Xero offers apps with a wide range of functionalities from cash flow forecasting, to document management, and many more. The Xero app marketplace is the best way to explore your options.

Finally, if you work with one, ask your accountant to check your set up. They may need to add year-end conversion balances and can ensure that your year-to-date figures are as expected.

Free Download! The Ultimate Guide to Cash Flow Forecasting

Get our top tips on how to forecast your cash to make better decisions for your business.

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Float is one of the highest-rated Xero apps available on the marketplace. It is an award-winning cash flow forecasting tool that creates accurate and visual reports for you, and your business. Float pulls through the bills and invoices from your accounting software, using them to populate your forecast on a rolling-basis. Float’s integration with Xero means no more manual data entry, and an always up-to-date and accurate forecast.

To learn more about how to use Float sign up for a free trial today.

Harriet Stevenson

Conversion Marketing Manager at Float

Written by Jane