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ERP or Cloud? Busting the Xero Transaction Limits Myth

by Danny Ing, Cin7 Founder
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Many inventory-based companies view transaction limits as a barrier to moving from ERPs to cloud-software like Xero. These 3 inventory hacks render transaction limits meaningless.

By now, most companies realize that the cloud is the best way to get their software. In fact, in 2018, up to 58% of businesses were already using cloud-based accounting, according to an Accounting Today survey. Inventory-focused companies are following suit.

While you can get plenty of inventory functionality from accounting software like Sage 100 and Sage 500, the cloud is clearly preferable to Sage’s old desktop/ERP way of doing things. The cloud’s best-of-breed approach allows brands to use software that excels in specific areas of expertise, which can be tied seamlessly to other cloud software. The cloud lets you mix and match for your specific needs more precisely than an ERP ever could.

Many inventory companies have been able to transition nicely to the cloud using software like Xero for accounting functionality, along with Cin7 for inventory

However, there still remains a perceived roadblock to adopting the cloud. When inventory companies weigh Sage against Xero, they see Xero’s transaction limits as a negative. Specifically, the limit is seen as extremely low and restrictive; surpassing it slows Xero’s response time and reports take longer to generate.

But if you take a closer look, it becomes apparent that the limit is ample for 95% of inventory businesses.

Working Around the Xero Transaction Limit

Different systems are used for different purposes: accounting for overall profitability and financial compliance; inventory for operations and channel gross-profit analysis. 

With that in mind, there are multiple ways to turn operational information into condensed financial information. You can condense operational information by 10 to 100 times by batching orders, order line items and COGS. That, in turn, reduces the number of transactions you must push from your inventory software to Xero. Here’s how it works.

1. Batching cash, credit and eCommerce orders by payment type
If you run a retail store or an eCommerce business, you don’t need to track accounts receivable. You can turn an unlimited number of orders for a given day into a small number of transactions batched by payment type. 

For example, let’s say you make $2,500 in cash sales and $3,300 in credit card sales on a particular day. No matter what transaction volume those sales add up to in your inventory or retail system, your accounting system receives a significantly smaller number of transactions for that day. 

Batching by payment type has the added benefit of being easy to reconcile with your bank account, as these are the amounts that will appear in the bank and be subsequently downloaded by Xero for reconciliation.

2. Batching line items for on-account orders
If a business has wholesale customers, every order must be reported in Xero as an invoice owed by that customer account. An on-account order, therefore, cannot be batched with other transactions. 

On-account orders, however, are unlikely to break the transaction limit. Most businesses have little more than a few on-account customers, and even those who do a lot of wholesale business are unlikely to receive an order from every customer every month. So for these businesses, transactions aren’t the issue; line items are. An on-account order can average between 10 and 200 line items, occasionally surpassing 500.

What is little-known is that, while Xero has a transaction limit, what actually slows Xero down is the number of general ledger entries and, in the case of inventory, each line in a transaction. But in many situations, a company can send invoices to their customers from their inventory system instead. 

That means that Xero doesn’t need all that product information. If a sales order has 100 line items, they can be batched into a single line item or one line per GL account (usually one or two lines). This takes a massive load off the Xero system, making filing those end-of-month tax returns a breeze while keeping your Xero account running at a good speed.

3. Batching COGS
It’s important for companies to show live COGS data in their P&Ls. However, the better approach is not to post COGS for each transaction dispatched in the inventory system. There are two reasons for this: 1) the transaction limits issue and 2) because the dispatch date is not always the invoice date in Xero. (Many systems treat this as one date, which is actually incorrect.) 

The better approach is to batch COGS by month of invoice by GL code, which you can reduce to one to a handful of COGS entries per month, no matter how many transactions you process in Xero. Note: It is important to post COGS for a transaction to the month of the invoice date so that revenue and COGS land in the same month.

Each COGS entry can be voided and updated throughout the month, meaning that only a single entry is actually active and up to date through that period. At the end of a month, you can update the preceding month’s COGS as changes are made in your inventory system. The most common change, for example, would be landed costs. So, when a landed cost has been applied to an order dispatched in the previous month, your COGS entry can be updated to reflect that amount.

The Good News

So, by batching information from your inventory solution and providing only what Xero needs, 95% of all inventory businesses can easily transition from Sage 100/500 to a best-of-breed model using Xero for accounting and the inventory management system of your choice. When you do batching right, your accounts team won’t be inundated by unnecessary information. They’ll save time reconciling your accounts, and they’ll get much more accurate P&L statements.