One of Xero’s many standout features is the ability to use tracking categories. Tracking categories can provide SIGNIFICANT benefits to your business, ultimately enhancing your financial management, decision-making processes and profitability.
Note: Tracking categories are not just unique to Xero, plenty of other online bookkeeping software have this capability including: MYOB, Quickbooks Online, Zoho Books, Sage Business Cloud Accounting, and Wave.
Detailed Financial Insights with Xero Tracking Categories
Tracking categories let you break down your financial information into specific segments, like departments, projects, or locations, giving you clearer insights into your business. At Freshwater Tax, we use tracking categories to gain a clearer understanding of our sales streams, which include Personal Tax, New Business Setups, General Advice, Virtual CFO, Bookkeeping & BAS, Sole Traders, and Entity Tax. While we could simply code these directly to their profit and loss accounts, tracking categories allow us to take things a step further by tagging expenses directly related to each segment. This gives us a crystal-clear view of the profitability of each revenue stream, making it much easier to identify which areas of the business could use a little more love and attention.
Why Use Xero Tracking Categories?
- Crystal-Clear Financial Insights: Discover which parts of your business are thriving and where you might need to make changes.
- Confident Decision-Making: Use these insights to make smart, data-driven decisions, like reallocating resources or adjusting pricing to maximise profitability.
- Stay on Budget: Keep an eye on your spending in real time, so you’re always in control of your cash flow.
Who Benefits from Xero Tracking Categories?
Regardless of if you’re a solo entrepreneur or running a growing team, tracking categories can make a big difference:
Project-Based Businesses: If you run a business like a construction company, marketing agency, or consulting firm, tracking categories can help you keep a close eye on project-specific income and expenses, monitor profitability, and stick to your budget.
Retail and E-Commerce: Managing multiple product lines, locations, or sales channels? Use tracking categories to see what’s selling, what’s not, and make smart decisions about inventory and marketing.
Service-Based Businesses: For hotels, restaurants, or other service providers, tracking categories help you understand which services are most profitable and where you can cut costs or boost efficiency.
Freelancers and Sole Traders: Track income and expenses by client, project, offering, or service type to find out who your best customers are and make sure you’re spending your time and resources wisely.
Non-Profit organisations: Easily track donations, grants, and expenses by funding source, program, or event to stay compliant and transparent with your donors.
Manufacturing Businesses: Use tracking categories to manage costs and revenues by production line, product type, or stage, helping you nail down cost control and pricing strategies.
A Real-Life Success Story
One of our clients, a boutique marketing agency, was having trouble figuring out which services were the most profitable. By setting up Xero tracking categories, they could see the performance of each service – SEO, social media management, content creation, and more. They discovered that social media wasn’t bringing in as much profit as expected. With this knowledge, they adjusted their strategy, focused on high-profit areas, and saw a 20% increase in profitability within just six months!
Getting Started with Xero Tracking Categories: Our Simple Guide
- Decide What to Track: Start by choosing the key areas you want to focus on, like departments, projects, or products.
- Set Up in Xero: Head to the “Settings” menu in Xero, select “Tracking,” and create your categories. Add specific options for each category – for example, “Sales,” “Marketing,” or “Operations.”
- Keep It Consistent: Make sure you’re always assigning transactions to the correct categories to keep your data accurate.
- Review Regularly: As your business grows, revisit your tracking categories to make sure they’re still serving you well.
Pro Tip: Don’t go overboard with categories – start small and build as you go. Make sure everyone on your team understands how to use them!
Integrate with Other Tools for Extra Insights
Xero tracking categories can be integrated with other tools such as: inventory management, CRM, and payroll systems. This creates a more complete view of your business, making it even easier to make informed decisions. As a client of Freshwater, you get access to our easy-to-use reporting software that links with your online bookkeeping. We’ll provide you with regular reports on your business performance, including key statistics and, if you choose, detailed insights into the profitability of each segment.
Challenges to Watch Out For:
While tracking categories are fantastic, they can also get overwhelming if not managed well. Here are a few tips to keep things simple:
- Start with Key Categories: Focus on what matters most.
- Regular Check-Ins: Review your categories regularly to keep them relevant.
Final Thoughts
Tracking categories offer a powerful way to enhance your financial clarity and take control of your business’s performance. Whether you’re using Xero or another online bookkeeping software, these features provide invaluable insights that help you make smarter, data-driven decisions, optimise your resources, and keep your finances on track.
At Freshwater Tax, we’ve seen firsthand the difference that tracking categories can make for our clients, from boosting profitability to improving budgeting and resource allocation. By starting with a few key categories and integrating them into your regular financial management, you can unlock new levels of visibility and control over your business.
Ready to take the next step? If you’re a Freshwater client, we’re here to help you set up and make the most of tracking categories. Reach out today to learn how we can support you in achieving your business goals.
