Why XIRR is useful
A single lump-sum investment has a simple beginning and ending value. Real investment records can be more complicated: you may add money on several dates and later withdraw part of it. XIRR incorporates those dates into the annualized return calculation.
How cash flows are treated
Investments are normally entered as negative cash flows because money leaves you. Withdrawals or the final value are positive cash flows because money comes back to you. The dates matter to the calculation.
Example
Imagine three investments made on different dates followed by a final withdrawal. A simple total-return calculation would not fully reflect how long each contribution was invested. XIRR accounts for the timing of each cash flow.
XIRR vs CAGR
CAGR is suited to a beginning value, ending value and a defined period. XIRR is designed for multiple dated cash flows. The appropriate method depends on the structure of the investment.
Important limitation
XIRR is an annualized calculation based on the cash-flow data you provide. It does not predict future performance.