How to set up and use budgeting tools in Xero for better financial planning
Financial planning is one of the most important activities for small businesses. A clear understanding of income, expenses, and cash flow allows business owners to make informed decisions, plan for growth, and avoid surprises. In New Zealand, many small businesses use Xero, a cloud-based accounting software, to manage their finances. One of Xero’s most powerful yet often underutilized features is its budgeting tools. By leveraging these tools effectively, businesses can create realistic budgets, monitor performance, and achieve financial goals.
This guide walks through how to set up and use budgeting tools in Xero, including practical tips, examples, and strategies to optimize your financial planning.
Why Budgeting Matters for Small Businesses
Budgeting is the process of planning your business’s income and expenses for a specific period, usually monthly, quarterly, or annually. Here’s why it’s crucial:
Forecast cash flow – Ensures that your business has enough cash to cover operational costs.
Identify inefficiencies – Helps spot areas where costs can be reduced.
Set financial goals – Provides a roadmap for growth and profitability.
Measure performance – Allows you to compare actual results against planned targets.
Improve decision-making – Enables data-driven decisions based on realistic projections.
Without a clear budget, small businesses often struggle with overspending, cash flow shortages, and missed opportunities. Xero’s budgeting tools make this process automated, accurate, and flexible.
Getting Started with Xero Budgets
Before creating a budget in Xero, it’s important to prepare your financial data:
Ensure your chart of accounts is up to date.
Reconcile bank accounts and transactions.
Have historical financial data available (at least 6–12 months).
These steps ensure that your budget is grounded in reality rather than guesswork.
Step 1: Setting Up Your Budget in Xero
Login and Navigate – After logging into Xero, go to Reporting → All Reports → Budget Manager.
Create a New Budget – Click “Add Budget” to start a new budget.
Choose the Financial Year – Select the period for your budget, such as the current financial year.
Select Accounts – Xero allows you to create budgets for:
Income accounts (e.g., sales revenue)
Expense accounts (e.g., rent, utilities, marketing)
5. Set Budgeted Amounts – Enter planned figures for each account. You can do this manually or import historical data to speed up the process.
Tip: Start conservatively with revenue estimates and realistically with expenses to avoid overestimating profitability.
Step 2: Using Tracking Categories
Xero offers tracking categories to give you deeper insights into specific areas of your business. For example:
Departments (Sales, Marketing, Operations)
Locations (North Island, South Island branches)
Projects or clients
By combining budgets with tracking categories, you can see which areas are underperforming or exceeding expectations. This is especially useful for businesses with multiple revenue streams or locations. Note - you will need to prepare a separate budget for each tracking category in Xero.
Step 3: Importing Historical Data
Xero allows you to import past financial data to create a budget quickly. Steps include:
Export historical income and expense data from previous years.
Download the budget template from Xero
Adjust figures as needed based on expected changes in revenue or expenses.
Upload the CSV or Excel doc into Xero Budget Manager.
This method reduces errors and ensures that your budget reflects actual business trends.
Step 4: Comparing Budget vs. Actuals
One of Xero’s most powerful features is the ability to compare your budgeted figures against actual results. This comparison allows you to:
Track progress against targets.
Identify overspending or underperforming areas.
Make timely adjustments to your operations.
To access this report: Reporting → All Reports → Budget Variance → Select Budget and Period. This generates a clear visual report showing variances and percentages.
Step 5: Adjusting Your Budget
Budgets are not set in stone. As the year progresses, businesses may experience unexpected changes such as:
Fluctuating sales
Increased operational costs
Seasonal demand variations
Xero makes it easy to update your budget:
Edit existing figures in the Budget Manager.
Re-run budget variance reports to track progress.
Use the insights to make strategic decisions, such as reducing costs or reallocating resources.
Best Practices for Budgeting in Xero
Use realistic assumptions – Avoid overestimating income or underestimating expenses.
Separate fixed and variable costs – Helps identify areas for potential savings.
Monitor monthly – Regular reviews ensure you catch issues early.
Involve your team – Collaboration improves accuracy and ownership of financial targets.
Integrate with cashflow planning – A budget alone is not enough; track cash inflows and outflows carefully.
Benefits of Using Xero for Budgeting
Automation – Reduce manual calculations and human error.
Accessibility – Cloud-based software allows you to access budgets anytime, anywhere.
Insights – Generate visual reports with charts and graphs for clear understanding.
Scalability – Suitable for businesses of all sizes and industries.
Time-saving – Streamlined processes save hours compared to traditional spreadsheets.
Common Budgeting Mistakes to Avoid
Ignoring historical data – Budgeting without data often leads to unrealistic targets.
Failing to update the budget – Budgets must evolve as business conditions change.
Neglecting cash flow – Profit projections alone don’t guarantee liquidity.
Overcomplicating the budget – Keep it simple and actionable.
Not using Xero’s features – Not leveraging tracking categories or variance reports limits insights.
Conclusion
Budgeting is essential for any small business looking to grow, stay profitable, and make informed decisions. Xero’s budgeting tools simplify this process, providing clarity, automation, and actionable insights. By setting up budgets, using tracking categories, comparing actuals with targets, and adjusting for changes, small business owners can maintain control over their finances and confidently plan for the future.
With proper use of Xero budgeting tools, businesses not only manage their finances better but also unlock opportunities for growth, strategic planning, and long-term success.
What our clients say
“Dylan is one of the best accountants I've worked with. He makes a point of explaining things as plainly as possible to those of us who don't understand accounting speak. He has a solid knowledge of best practices in the industry, but most importantly he will always recommend what is most suitable for your specific business. I will continue to recommend Dylan and Affinity Accounting to my clients when they are looking for an accountant.”
-Jay Brooker