Xero tracking categories
You already have account codes in Xero, do you need another layer, or two, of coding?
Every time you record a transaction in Xero you have to select an account code. You can choose to make the account codes as detailed or as summarized as is useful for you. A classic example is that you might have one code called “printing, postage and stationery” or if it’s useful in your context you could have three codes: “printing”, “postage”, and, “stationery”.
You can add another layer of analysis using Tracking Categories in Xero. These can give you additional analysis without having to create an overwhelming number of account codes. As a simple example let’s say that your organisation works across the UK and you want to track your income and costs by region, North, South, East and West. Let’s also say that you have 30 expense account codes set up in Xero.
One option would be to create new account codes so that your “printing” code becomes “printing –North”, “printing – South”, “printing – East” and “printing – West”. The problem with this route is that your 30 account codes is now 120 codes which is a bit overwhelming to work with. It also means that your reporting will be clunky as you can’t easily separate the “north” codes from the “south” codes to see the profit in the North and the profit in the South. Plus, if you want to see the total printing cost for the organization you have to add 4 codes together. Overall, it’s a clunky solution.
A better option would be to set up a Tracking Category called “Region” and then 4 tracking options sitting within that category called “North”, “South”, “East” and “West”. Then every transaction that gets entered into Xero will have the relevant tracking option selected as well as the relevant account code. You can then run reports on a total account code basis which ignores the tracking categories or you can filter your reports so that you can see the results for each region, or a combination of regions.
In Xero you can have two different categories each with a number of tracking options sitting under that category. In our example “region” is the category and “north, south, east and west” are the options.
The North, South, East, West example is probably overly simplistic for real life. But we do see our clients using the tracking categories for:
- Department – marketing, sales, operations, fundraising, service delivery etc
- Business Units – eg. brewery, bar, restaurant – three distinct segments of the same business
- Project / Activity – eg. a charity may conceptualize the key activities as volunteering, education, service delivery and support.
- Site – to track income and costs related to specific geographical sites
- Restricted Fund – relevant for our charity clients
For a few of our charity clients we have set up the tracking categories so that they can track restricted/designated/unrestricted funds and this is incredibly helpful for the financial management and reporting. If you’re going to go down this route then it’s worth putting some thought into whether you need to track “Fund” or “Funder” as they aren’t always necessarily the same thing.
The structure of your chart of accounts needs to be driven by the outputs you need and want. Think about your stakeholders, who you need to report to and what info they need. And that should help to shape the structure that you set up. Setting up the right structure from the beginning will save you a whole lot of problems in future. You need it to deliver what you need now but also have a level of future proofing so it can suit the needs of the organization as it grows and develops. It isn’t like the mythical unicorn. It is possible. And Tracking Categories can be part of your toolkit to make it happen.
If you want to know more about this and how we’ve helped clients to get this right then feel free to get in touch:
☎ 0330 1330 774