Xero is the most widely used accounting software for Australian trade businesses — and for good reason. When set up properly, it handles invoicing, BAS lodgement, payroll, expense tracking, and bank reconciliation with minimal ongoing effort. When set up poorly, it creates more problems than a spreadsheet.

This guide walks through exactly how to configure Xero for a trade business, what settings matter most for tradies, and how to avoid the setup mistakes that create hours of cleanup work later.

Before You Start: What You Need

Before logging in and clicking through Xero's setup wizard, gather the following:

  • ABN and GST registration details
  • Business bank account BSB and account number (for bank feed setup)
  • BAS lodgement frequency (quarterly for most tradies — confirm with your accountant)
  • Accounting method — cash or accruals (most small tradies use cash)
  • Financial year start — 1 July for Australian businesses
  • Employee details if you have staff: TFN declarations, bank accounts, super fund details
  • Opening balances if you're migrating from another system — your accountant provides these

Step 1: Create Your Organisation

When you first sign into Xero:

  1. Go to Settings → Organisation Settings
  2. Enter your legal business name (the name registered with ASIC or your ABN entity)
  3. Enter your trading name (if different)
  4. Enter your ABN
  5. Set your financial year start to 1 July
  6. Set your tax basis — Cash or Accruals
  7. Set your GST basis — Cash or Accruals (usually matching your income basis)
  8. Set your GST registration date
  9. Set your BAS frequency — Quarterly for most tradies

Accounting method note for tradies: Cash basis means you record income when you receive payment and expenses when you pay them. This is simpler and better for cash flow management. Accruals means income is recorded when invoiced, expenses when billed. Your accountant will advise which suits your circumstances.

Step 2: Set Up Your Chart of Accounts

The Chart of Accounts is the backbone of Xero — the categories into which every transaction is classified. Xero loads a default Australian chart, but tradies should customise it.

Income accounts:

  • Labour Income (or split: Residential Labour / Commercial Labour)
  • Materials Supplied
  • Call-out Fees
  • Project Income
  • Maintenance / Service Contract Income

Cost of Goods Sold (COGS) / Direct Costs:

  • Materials Purchased
  • Subcontractor Costs
  • Direct Labour (wages for employees doing billable work)
  • Hire Equipment (job-specific)

Overhead Expenses:

  • Vehicle Expenses — Fuel
  • Vehicle Expenses — Registration, Insurance, Service
  • Vehicle Expenses — Loan Interest
  • Tools and Equipment
  • Tools Insurance / Public Liability Insurance
  • Income Protection Insurance
  • Accounting and Bookkeeping Fees
  • Software Subscriptions (Xero, Tradify, ServiceM8)
  • Marketing and Advertising
  • Phone and Internet
  • Training and Licences
  • Superannuation (employee)
  • Wages — Admin
  • Bank Fees
  • Repairs and Maintenance (office/workshop)

Ask your accountant to review your chart of accounts before you start using it. Changing categories after hundreds of transactions are coded is time-consuming.

Step 3: Connect Your Bank Feed

This is Xero's most powerful time-saving feature. A bank feed automatically imports your bank transactions into Xero daily — eliminating manual data entry.

To set up:

  1. Go to Accounting → Bank Accounts
  2. Click Add Bank Account
  3. Search for your bank (ANZ, CBA, NAB, Westpac, and most others are supported)
  4. Follow the prompts — you'll need your internet banking login
  5. Set the start date for the feed (typically the start of your current financial year)

Once connected, transactions appear in Xero within 24 hours. You then "reconcile" them — matching them to invoices you've raised, bills you've entered, or categorising them into the correct expense account.

Tip for tradies: Also connect your business credit card and any fuel card accounts. The more accounts feeding into Xero, the more complete your financial picture.

Step 4: Set Up Invoicing

A well-configured invoice template saves time and looks professional. In Xero:

  1. Go to Settings → Invoice Settings
  2. Upload your business logo
  3. Set your default invoice terms (e.g., "Payment due 14 days from invoice date")
  4. Add your bank account details to the invoice footer (BSB and account number for EFT payment)
  5. Configure invoice numbering (e.g., INV-0001, or year-based like 2526-001)
  6. Add a default message on the invoice body (e.g., "Thank you for choosing [Business Name]")

For tradies sending progress invoices: Set up your line item defaults to include description fields for "Job Address," "Stage of Works," and "Date of Works" — commercial clients and builders need this detail.

Payment terms tip: Many tradies use 14 days for residential and 30 days for commercial. Xero lets you set different default terms per contact — useful if you have a mix of client types.

Step 5: Set Up Contacts

Import or enter your regular clients and suppliers as Contacts in Xero. For each contact:

  • Set their default payment terms
  • Add their ABN (for tax invoice compliance and TPAR reporting)
  • Add their email address (for sending invoices directly from Xero)
  • Note whether they're a GST-registered supplier (affects how you code their bills)

For suppliers you pay regularly (builders merchants, tool suppliers, fuel cards), set up the contact before you receive their first bill. When the bank feed imports their payment, Xero will suggest the matching contact automatically.

Step 6: Set Up Payroll (If You Have Employees)

Xero Payroll handles Single Touch Payroll (STP) reporting, pay runs, super calculations, and payslips.

Initial setup:

  1. Go to Payroll → Payroll Settings
  2. Set your payroll calendar (weekly, fortnightly, or monthly)
  3. Enter your business bank account for wage payment
  4. Set your super clearing house — Xero has an integrated super clearing house that allows you to pay all employees' super with one payment

For each employee:

  1. Enter name, date of birth, TFN, address
  2. Set their pay rate (check against the relevant Modern Award)
  3. Add their employment type (full-time, part-time, casual)
  4. Enter their super fund and member number
  5. Enter their bank account for wage payment
  6. Set their tax withholding from their TFN Declaration form

Running your first pay run:

  • Go to Payroll → Pay Runs → New Pay Run
  • Select the payroll period
  • Review auto-calculated wages, PAYG withholding, and super
  • Click Post to finalise and create payslips
  • The STP report is automatically sent to the ATO

Step 7: Configure BAS Settings

Xero can prepare and lodge your BAS directly with the ATO via a linked tax agent, or export the figures for your accountant to lodge.

  1. Go to Settings → Tax
  2. Confirm your GST registration date
  3. Set your BAS frequency and accounting method

When your BAS period ends, go to Accounting → Reports → Activity Statements. Xero pre-populates the BAS from your reconciled transactions. Review the figures, make corrections if needed, then either lodge directly (if connected to the ATO's systems through your accountant) or send the report to your accountant.

Setting up the ATO connection: Your accountant links their practice to your Xero file, allowing BAS lodgement directly from Xero. This is far more efficient than emailing reports and is now standard for most accounting firms.

Step 8: Set Up Tracking Categories (Job Costing)

This is a step many tradies skip — and it's one of the most valuable for growing trade businesses.

Xero's Tracking Categories allow you to tag income and expenses to specific jobs, projects, or cost centres. This enables per-job profitability reporting.

  1. Go to Settings → General Settings → Tracking Categories
  2. Create a tracking category called "Job" or "Project"
  3. Add your current jobs as options (e.g., "Smith Renovation – 47 Oak St," "Commercial Fitout – ABC Building")

When you raise an invoice or enter an expense, tag it to the relevant job. At month-end, run an Profit and Loss by Tracking Category report — it shows exactly which jobs made money and which didn't.

For larger trade businesses, consider integrating Xero with Tradify or ServiceM8 — these job management tools sync to Xero and automate job costing completely.

Step 9: Set Up Xero's App Marketplace Integrations

Xero integrates with hundreds of apps. For tradies, the most useful are:

  • Tradify — Job management, quoting, scheduling — Full job lifecycle to Xero sync
  • ServiceM8 — Job management, mobile dispatching — Syncs invoices and payments to Xero
  • Hubdoc — Receipt capture and OCR — Automatically reads receipts into Xero
  • Dext — Receipt and expense management — Alternative to Hubdoc
  • Stripe / Square — Payment acceptance — Customer payments sync to Xero
  • Payroll only (Keypay) — Payroll alternative — More complex payroll scenarios

The combination of Tradify + Xero or ServiceM8 + Xero is the gold standard for most trade businesses — quotes, jobs, invoices, and payments all flow automatically.

Step 10: Set Your Opening Balances

If you're starting Xero mid-year or migrating from another system, you need opening balances — the financial position of your business at the point you start using Xero.

Your accountant provides these, typically as:

  • Bank account balances
  • Accounts receivable (outstanding customer invoices)
  • Accounts payable (bills you owe)
  • GST position
  • Loan balances

These are entered in Accounting → Advanced → Conversion Balances. Get this right before you enter any transactions — correcting opening balance errors later is time-consuming.

Common Mistakes Tradies Make Setting Up Xero

Mistake 1: Skipping the chart of accounts customisation. Using Xero's default categories means your reports don't reflect how a trade business actually works. You can't see materials vs labour income, or distinguish direct costs from overheads.

Mistake 2: Not connecting a bank feed immediately. Every day without a bank feed is a day of manual transaction entry later. Connect it on day one.

Mistake 3: Not setting up payroll STP correctly. Missing STP reports or setting up payroll incorrectly leads to ATO compliance issues. Get your accountant to review your payroll setup before running the first pay run.

Mistake 4: Not using tracking categories. Without job tracking, Xero tells you whether you made a profit — but not which jobs made it. Job costing is critical for pricing decisions.

Mistake 5: Coding everything to one expense account. When every expense goes into "General Expenses," your reports are meaningless. Take 30 minutes to code transactions correctly from day one.

Mistake 6: Not reconciling weekly. Transactions pile up and reconciliation becomes a chore if left for months. 15 minutes per week keeps it current and catches errors early.

Xero Subscription Plans for Tradies

Xero has multiple plan tiers. For most trade businesses:

  • Ignite (formerly Starter, ~$35/month): Limited invoices and bills — too restrictive for active trade businesses
  • Grow (formerly Standard, ~$60/month): Unlimited invoices, bills, bank reconciliation — suitable for sole traders and small trade businesses
  • Comprehensive (formerly Premium, ~$85/month): Adds multi-currency and payroll for more employees — recommended once you have staff
  • Ultimate (~$115/month): Includes advanced analytics and project tracking — suited to larger operations

Prices change — check xero.com for current pricing. Xero frequently offers discounts for new subscribers.

Frequently Asked Questions

Q: Should I set up Xero myself or get my accountant to do it?
A hybrid approach works best: your accountant handles the chart of accounts, opening balances, and payroll setup; you handle the day-to-day bank reconciliation and invoicing. Many accounting firms offer a Xero setup service for $300–$600 — well worth it to avoid setup mistakes.

Q: How long does a typical Xero setup take?
Initial setup (organisation settings, chart of accounts, bank feeds, invoice template) takes 2–4 hours if you have all the information ready. Payroll setup adds 1–2 hours. Ongoing reconciliation after that is typically 15–30 minutes per week for a sole trader.

Q: Can I use Xero on my phone?
Yes. The Xero app for iOS and Android lets you create and send invoices, photograph receipts, and view reports. It's not as powerful as the desktop version, but sufficient for on-site invoice creation and expense capture.

Q: How do I migrate from MYOB to Xero?
Most accountants who switch clients to Xero handle this process. It involves exporting data from MYOB, importing to Xero, and reconciling opening balances. The transition typically takes 1–4 weeks depending on the complexity of your existing data.