Using Xero Tracking Categories to Get Better Reports

What Are Xero Tracking Categories?

Think of Tracking Categories in Xero as tags you apply to transactions—like invoices, bills, bank transactions, or manual journals. These tags help you organize your financial data beyond the traditional chart of accounts.

Each business can set up two active Tracking Categories, and each category can contain up to 100 individual options.

For example:

By applying these to your transactions, you can run profit and loss reports filtered by any of these segments.

Why Use Tracking Categories?

When your business starts to grow, your financial reporting needs to grow with it. The more moving parts you have—multiple locations, service lines, or product offerings—the harder it becomes to get clear, actionable insights from standard reports. That’s where Xero Tracking Categories come in.

Tracking Categories let you break your financial data down by the parts of your business that matter most, without cluttering your chart of accounts or relying on complicated spreadsheets.

Here's how they help you go from general financials to granular, decision-ready data:

1. Gain Clarity Without a Messy Chart of Accounts

Rather than duplicating income and expense accounts for each business unit (like “Travel – Sales,” “Travel – Marketing,” etc.), you use a single account (like “Travel”) and track by category. It’s clean, scalable, and reduces clutter.

2. Compare Business Segments Side-by-Side

Want to know which location is most profitable? Or which product line is losing money? With Tracking Categories, you can compare these in custom P&Ls with just a few clicks.

3. Make Smarter Decisions

Knowing where your revenue is strongest or which departments are over budget helps you prioritize investments, adjust pricing, or cut costs. This visibility is crucial for growing businesses.

Tracking Categories transform Xero from a basic bookkeeping tool into a powerful reporting engine. They give you a cleaner way to organize your data, make apples-to-apples comparisons across business segments, and ultimately support better, faster decision-making. Whether you're managing one brand across several locations or juggling multiple services under one roof, Tracking Categories help you make sense of the numbers that drive your business forward.

Common Use Cases by Business Type

No two businesses are exactly alike—and neither are the ways they use Xero Tracking Categories. Whether you’re running a fast-growing SaaS company, a bustling retail chain, or a client-focused creative agency, Tracking Categories can help you gain clearer insights into the parts of your business that matter most.

In this section, we’ll explore how different types of businesses apply Tracking Categories to monitor performance, make informed decisions, and simplify their financial reporting—without overcomplicating their chart of accounts.

Let’s break it down by industry to see what’s possible.

Multi-location Retail

Tracking Category: Store Location

Options: LA, SF, NYC (or any cities/stores you operate in)

Retail businesses with multiple storefronts—whether they’re boutiques, coffee shops, or bike shops—need to track the performance of each location individually. What sells in Denver may flop in Austin. Tracking Categories make it easy to view location-based performance without complicating the chart of accounts.

Creative Agency

Tracking Category: Client

Options: Nike, Pepsi, Spotify

Creative agencies juggle multiple clients, campaigns, and deliverables across teams. Understanding which clients are profitable (and which are draining resources) is essential for pricing services correctly and managing project scope. Tracking Categories help agency owners see the financial picture client by client.

SaaS Business

Tracking Category: Product Tier

Options: Basic, Pro, Enterprise

Software-as-a-Service (SaaS) companies often offer different subscription plans, add-ons, or modules. Knowing how each product tier performs in terms of revenue, churn, and support costs helps guide roadmap decisions and marketing focus. Xero Tracking Categories allow SaaS businesses to isolate financial results by plan or product.

Law Firm

Tracking Category: Practice Area

Options: Litigation, Family, Intellectual Property

Law firms typically operate across several legal practice areas, each with unique workflows, billing structures, and staffing needs. By using Tracking Categories for each specialty—like litigation, family law, or intellectual property—firms gain insight into which areas drive revenue and which may need rebalancing.

Franchise Owner

Tracking Category: Franchise Location

Options: Store #101, Store #102, Store #103...

Franchisees managing multiple units under a parent brand need to evaluate each location’s financial health. Whether it’s a fast food chain or a group of fitness studios, Xero Tracking Categories let owners compare stores side-by-side, making it easier to optimize operations and maximize profitability across the portfolio.

How to Set Up Tracking Categories in Xero

Step 1: Define Your Business Segments

Before jumping into Xero to create your Tracking Categories, the most important—and often most overlooked—step is to think strategically about how your business operates and where better data could drive better decisions.

This step is all about identifying the key dimensions of your business that you want to analyze independently.

Ask Yourself These Strategic Questions

Common Segmentation Examples:

Here are some common ways businesses break out their operations using Tracking Categories:

Tips for Choosing the Right Segments

• Keep It High-Level: Avoid overly granular segments. For example, track by city, not by individual employee—unless employee-level reporting is critical to your operations.

• Think About Reporting, Not Just Input: The point isn’t just to tag things—it’s to run reports that answer meaningful questions. If you wouldn’t want to see a P&L split by that variable, it may not be a good candidate.

• Align with Business Goals: If your company is expanding to new markets, track by region. If you’re refining your product strategy, track by product tier. Your goals should guide your segmentation.

• Map It to Operational Realities: Choose segments you can track consistently. If your team forgets to assign the right option—or if your workflows don’t naturally support it—you’ll end up with spotty, unreliable data.

• Avoid Overlap; Make sure your two categories serve distinct purposes. For example, avoid setting one category as “Team” and another as “Employee” unless both are truly essential and reportable.

Once you’ve mapped out these dimensions, you're ready to move on to Step 2: Creating Tracking Categories in Xero—where the setup magic happens.

Step 2: Create the Tracking Categories

In Xero, go to Accounting > Advanced > Tracking Categories

Click “Add Tracking Category”

Give it a name (e.g., “Location”) and add options (e.g., “Chicago,” “Phoenix,” etc.)

Step 3: Apply Them to Transactions

When you enter:

• Invoices

• Bills

• Bank Transactions

• Manual Journals

…you’ll see dropdowns to assign tracking options. You can also set defaults at the contact or inventory item level to speed up data entry.

Reporting with Tracking Categories

Once you’ve consistently applied tracking to your transactions, head over to:

Accounting > Reports > Profit and Loss (or other reports like Budget Manager or Balance Sheet)

From there:

1. Choose “Compare by” > Tracking Category

2. Select the category (e.g., Location)

3. Filter by date, accounts, or other dimensions

✨ Bonus Tip: Export to Excel or integrate with tools like Fathom or Syft for even more dynamic visual reporting by category.

Best Practices for Tracking Categories

Keep it Simple

Limit to high-value segments. Don’t overcomplicate things by tracking too many minor variations.

Be Consistent

Apply tracking to every transaction. Incomplete data = unreliable reports.]

Review Monthly

Run category-based reports monthly to spot trends, outliers, or problems early.

Use Automation

Set tracking defaults on repeating invoices, contacts, or bills to speed things up and reduce manual entry errors.

Limitations and Gotchas

• You can only have two active Tracking Categories at a time.

• There’s no retroactive bulk update for previously untracked transactions.

• If you need more than two categories (e.g., Location AND Department AND Client), you may need to use Tags in Xero Projects or connect to a BI tool like Zoho Analytics, Syft, or Fathom for advanced segmentation.

Final Thoughts

Xero’s Tracking Categories are a game changer for smart, scalable financial reporting. Whether you run a local bakery or a nationwide consulting firm, tracking the right segments gives you laser-sharp insights without overcomplicating your books.

Set them up, use them consistently, and start answering questions like:

• Which products are most profitable?

• Which teams are over budget?

• Which locations are dragging down overall performance?

Let your data tell the story—and use it to grow better.

Need help setting this up in your Xero file?