Tracking categories for not-for-profits

What a tracking category actually is

A tracking category is a second dimension on a transaction. The account says what kind of money it is. The category says which part of the organisation it belongs to.

That distinction is the whole feature. Without it, the only way to separate one fund, programme, department or location from another is to give each one its own accounts, which means the chart of accounts carries information that has nothing to do with accounting.

Xero allows two tracking categories per organisation. That limit is the single most important thing to know before you set any up, because the decision is difficult to reverse once a year of transactions is tagged.

The accounts say one thing and the grant spreadsheet says another, and reconciling them is somebody's weekend, four times a year.

What goes wrong first

The instinct when a new grant arrives is to add accounts for it. Income, expenses, sometimes a bank account. Repeat that across a dozen funds over several years and the chart of accounts is unreadable, and no report answers a simple question.

The symptom is a profit and loss that runs for pages, where two thirds of the lines are zero for the period, and where answering "how did the youth programme go this year" means exporting to a spreadsheet and adding up columns by hand.

The second symptom is worse: because the split lives in account names, nobody can report across funds. You can see what the youth programme spent on wages, and you cannot see total wages without picking the right dozen accounts out of eighty.

Tracking categories instead

You keep one clean chart of accounts and tag each transaction with the fund it belongs to. Xero will then produce a profit and loss per fund without any duplication.

1. Set up one tracking category named for what you actually report on, usually Fund or Programme.
2. Add an option per fund, and archive rather than delete when a fund closes, so history stays readable.
3. Make the category required on every transaction so nothing lands untagged.
4. Run Profit and Loss with the category as a column to produce per-fund reporting.

Step three is the one that decides whether this works. A category that is optional gets skipped, and a fund with 90 per cent of its transactions tagged is less useful than one with none, because the report looks complete and is wrong.

Do not use two categories for one purpose. Spending both on variants of the same idea removes the second dimension you will want later for location, programme or funding source. If you are tempted to create Fund and Fund Type, use one category and name the options carefully.

For a not-for-profit specifically

This is the worked case, and it is where the payoff is largest, because a not-for-profit reports to people who did not choose to be accountants.

Restricted funds are the reason. Money given for a purpose has to be shown to have been spent on that purpose, and a treasurer should be able to demonstrate it from the accounts rather than from a spreadsheet maintained beside them. One category named Fund, one option per grant, required on every transaction, and the acquittal report is a Xero report rather than a reconstruction.

The second category is then free for whatever the committee actually asks about: location, programme, or the difference between core operations and project work.

If your funds are currently tracked in a spreadsheet beside the accounts, and the two do not quite agree, that is the problem worth fixing first. See not-for-profit bookkeeping and fund tracking for how we do it, or Book a Call Today and bring the spreadsheet.