Xero for New Founders: What to Set Up First

Lay the foundations: entity, obligations, and basic settings

Good accounting starts before you touch a button. Decide how you will separate business and personal money, how you want income streams reported, and who will review the books. Even as a sole trader, it is wise to keep business transactions separate from personal spending. A dedicated business bank account makes your bank feed cleaner, your reconciliation faster, and your records easier to defend if asked to explain them.

Review your record‑keeping duties. GOV.UK sets out the business records the self‑employed must keep. The rules cover what to keep and how long to keep it. These obligations exist regardless of which accounting software you use. Note down any questions to discuss with an accountant, such as how to record mileage, home‑working costs, or project‑by‑project profitability in a way that suits your business and tax position.

In your accounting system’s organisation settings, confirm the legal name of the business, the trading name (if any), the contact details that will appear on sales invoices, and the financial year‑end. If you are VAT‑registered, check how VAT will be handled and confirm this with an adviser; different schemes and reporting approaches exist, and they affect how invoices and bills should be recorded. Set a goal to keep every transaction supported by a readable document, either stored in the software or linked in a consistent way.

• Decide how you will separate business and personal transactions and stick to it.
• Write down your reporting needs: by service line, by client, by project, or simple overall totals.
• Confirm the official business name, trading name, address, and financial year‑end in your software settings.
• Consider whether you will need software for Making Tax Digital for Income Tax and check the GOV.UK guidance on approved software.
• Plan where documents will live and how they will be attached to transactions.

Design a tidy chart of accounts and coding rules

Your chart of accounts is the language of your business in the books. Start with a lean set of income and cost categories that match how you make and spend money. If it is too detailed, coding becomes slow and inconsistent. If it is too sparse, you cannot see what matters. Aim for clarity: group revenue by main stream (for example, product sales and consulting) and costs by nature (for example, software, advertising, subcontractors). If your work is project‑driven, consider using tracking or tagging features in addition to accounts to avoid proliferating near‑duplicate accounts.

Set default accounts for common items so you do less repetitive coding. For example, link your standard service to your services income account, and your main subscription expense to a software expense account. For taxes on sales and purchases, choose tax options that align with your registration status and scheme. If unsure, ask an accountant to review and agree the defaults before you start issuing invoices and recording bills. Correct defaults save hours later and reduce rework at quarter‑ or year‑end.

Establish naming conventions. Consistent names help later when searching, reporting, or onboarding a bookkeeper. Keep account names plain English, avoid jargon, and document a one‑page coding guide. The guide should show which accounts to use for common scenarios and what backup documentation is expected in each case. Share it with anyone else who touches the books so decisions stay consistent over time.

• Review and prune the default chart of accounts; keep only what you need to start.
• Create income accounts aligned to how you sell; create cost accounts aligned to how you spend.
• Use tracking or tags for projects, regions, or teams instead of creating too many accounts.
• Set sensible default accounts and tax options for common products, services, and expenses.
• Write a short coding guide and store it where your team and accountant can see it.

Get bank feeds working and reconcile frequently

Accurate books depend on accurate bank data. Connect your business bank accounts and, if relevant, business credit cards to your accounting software’s bank feed feature. After connecting, confirm that the statement balance shown in the software agrees to your online banking balance on the same date. If you are missing earlier transactions, import a statement file covering the gap so your opening balance and history are complete.

Create simple bank rules for recurring items where the payee and pattern are clear. A well‑made rule saves time; a sloppy rule causes mis‑codings you later have to find and fix. Keep rules narrow at first and expand them only when you are confident they will not catch the wrong transactions. Reconciliation should be a regular habit, not a quarterly panic. Little and often works best: clear the bank feed, attach documents, and ask questions while details are fresh.

Treat unreconciled lines as to‑do items. If a receipt is missing, request it; if an amount is unfamiliar, investigate promptly. When you cannot resolve something right away, add a note explaining the next action. This leaves a breadcrumb for your future self or your accountant. The goal is a bank reconciliation page that is mostly empty because you have matched or explained items quickly.

• After connecting a bank feed, verify the statement balance matches your bank on the same date.
• Import historical statements if the feed does not cover your full start period.
• Create bank rules cautiously and review them monthly for unintended matches.
• Reconcile often and attach documents to matched transactions as you go.
• Use notes on tricky items so nothing is forgotten at month‑end.

Standardise sales, purchases, and document capture

Your sales process in the books should mirror how you sell in real life. Decide how you will create and send invoices, what reference and description format you will use, and how you will record part‑payments, deposits, or milestones if those apply. Set up your invoice layout with clear contact information and legal details appropriate to your business type. Create a clean numbering sequence and keep it consistent. If you accept online payments, consider adding a payment option to speed up settlement if your setup supports it.

On the purchase side, record supplier bills promptly so you have a true picture of what you owe. Standardise how receipts and invoices arrive in the system: by email, mobile capture, or file upload. The key is to make document capture easy enough that you will do it every time. Attach the supplier document to the bill or spend transaction so that anyone reviewing later can see what was paid and why. Consistent naming of uploaded files makes searches easier and avoids duplicates.

Contacts matter. Set up your customer and supplier records with correct legal names, contact emails, and if needed, billing addresses. For frequent items, define products or services with clear names and default accounts to speed up invoicing and reduce coding errors. Think ahead about credit notes, refunds, and deposits so you know how you will record them before you encounter them under time pressure.

• Create a clear invoice template with correct business details and a consistent numbering system.
• Decide one or two capture routes for receipts and supplier invoices and use them every time.
• Record supplier bills as they arrive; do not wait until payment day.
• Define products/services with default accounts and tax options to reduce coding decisions.
• Attach the source document to every sale, bill, and expense for a complete audit trail.

Close the loop monthly and collaborate with an accountant

A light but disciplined month‑end routine keeps your numbers reliable. Start by clearing the bank reconciliation and ensuring all documents are attached. Review aged receivables to chase overdue invoices and aged payables to plan cash outflows. Scan the profit and loss and balance sheet for unusual movements or negative balances that need investigation. If VAT applies to your business, prepare for the reporting obligations relevant to your scheme and period, and confirm settings and process with an adviser.

Lock dates once a period is final so accidental back‑dating does not disturb closed figures. Share a short monthly pack with your accountant: bank reconciliation summary, aged receivables and payables, profit and loss by month, and any questions you have flagged. Agree when journals such as depreciation, prepayments, or accruals will be posted and by whom. If you will be affected by Making Tax Digital for Income Tax, review the GOV.UK guidance on choosing compatible software and confirm whether your setup is listed and configured appropriately.

Finally, capture lessons. If reconciliation took too long, was it missing documents, unclear rules, or a bank feed issue? If customers pay late, is your invoice wording clear, or could enabling an online payment method help? Small improvements done monthly compound into a robust system that reduces surprises at year‑end. Your future self—and your accountant—will thank you.

• Run a simple month‑end: reconcile banks, review aged receivables/payables, and scan key reports.
• Lock prior periods once checked to prevent accidental changes.
• Share a short monthly pack and open questions with your accountant.
• Agree responsibilities for journals and adjustments before deadlines approach.
• If relevant, check GOV.UK guidance for Making Tax Digital for Income Tax software and ensure your setup aligns.

What to do, in order

1. 1

   Decide your structure, obligations, and document capture plan

   Confirm how you will separate business and personal transactions. Read the GOV.UK page on records to understand what you must keep and for how long. Choose how you will attach documents for every transaction so your trail is complete from day one.

2. 2

   Tailor a minimal, meaningful chart of accounts

   Prune the defaults to a lean set that matches your revenue streams and core costs. Add tracking or tags for projects or clients instead of creating lots of near‑duplicate accounts. Write a short coding guide to keep decisions consistent.

3. 3

   Connect bank feeds and reconcile little and often

   Link your business accounts, verify balances match, and import any missing history. Create cautious rules for recurring transactions. Reconcile frequently and attach documents as you go so month‑end is mainly review, not detective work.

4. 4

   Standardise sales and purchases

   Set up your invoice template, numbering, and item defaults. Decide how bills and receipts enter the system and use the same routes every time. Record supplier bills when they arrive and attach the document to each transaction.

5. 5

   Run a monthly close and lock dates

   Clear reconciliations, review aged receivables/payables, and scan key reports for anomalies. Share a short pack and questions with your accountant. Lock the period once checked to avoid accidental changes.