Xero Tracking for External Funding: A Guide for Charities

Xero tracking for external funding is one of the most powerful features available to UK charities managing restricted grants. Whether you’re reporting to multiple funders, splitting staff costs across projects, or preparing for your year-end, using Xero tracking for external funding gives you funder-ready reports in just a few clicks — without needing separate spreadsheets.

What Is Xero Tracking and Why Does It Matter?

Tracking categories in Xero allow you to tag every transaction with specific labels, such as the fund it belongs to or the project it supports. This is critical for charities managing external funding — especially when each grant has its own terms, reporting periods, and allowable costs.

Here’s how it works: You set up custom tracking categories in Xero (e.g. “Funds”, “Projects”, or “Cost Centres”) and apply those options to bills, invoices, payroll journals, and bank transactions. This creates a real-time picture of how your charity is using each fund.

Examples of Tracking for Charities

Charities commonly use two active tracking categories:

• Fund / Grant (e.g. National Lottery, Shared Prosperity Fund, CAF COVID Response)
• Project or Department (e.g. Youth Programmes, Café Enterprise, Energy Advice)

Each income or expense item can be tagged accordingly, giving you the ability to produce Profit and Loss reports by fund — essential for grant compliance.

How to Set Up Xero Tracking Categories

Setting up tracking in Xero is easy:

1. Go to Settings > Advanced > Tracking Categories
2. Click “Add Tracking Category” and name it (e.g. “Fund”)
3. Add each grant or fund as a separate tracking option
4. Assign the appropriate tracker to every relevant transaction

You can even apply trackers to historical data, and use tools like Xero Projects to make bulk tagging easier.

Benefits of Using Xero Tracking for External Funding

Once tracking is enabled, you’ll be able to:

• 💡 Generate fund-specific financial reports instantly
• 📈 Track overspend or underspend in real time
• 🧾 Provide clean, clear reports to funders with no extra work
• 👥 Allocate staff time and salary costs across multiple projects
• ✅ Improve audit readiness and year-end reporting

Fund tracking also supports better board reporting and gives your leadership team clarity and control — especially in multi-stream funding environments.

Common Mistakes to Avoid

Some common pitfalls when using Xero tracking for external funding include:

• Using tracking too broadly or inconsistently
• Failing to reconcile tracker totals with your income streams
• Not applying tracking to payroll or journals
• Having too many overlapping categories

With the right setup and training, these issues can be avoided — and your finance function will become dramatically more efficient.

Need Help with Xero Tracking for External Funding?

If you’re not sure where to start — or your Xero is a bit messy — we can help. Our team specialises in Xero tracking for external funding and can help you streamline your grant reporting process from end to end.

Learn more about our Xero for Charities support packages »

“Now we get reports by fund in seconds — it’s made our year-end and funder returns so much easier.”

— Gorebridge Community Development Trust