Xero in on Xero
Xero tracking categories is an incredibly powerful feature of Xero and can give you real-time reports on revenue and expenses by program and by grant/funder. The new FASB ASU 2016-14 will require all nonprofit organizations to present expenses by nature and function in a single location, commonly called a Statement of Functional Expenses, and tracking categories make that easy!
To create reports in compliance with ASU 2016-14 we are going to use the first of the two tracking categories available in Xero. That first tracking category is going to be for the functional area i.e. is the expense for a program, administration or fundraising. While ASU 2016-14 only requires us to report those three types of expenses, I recommend making the reporting much more useful for nonprofit management by breaking out the individual programs. So, you might end up with a tracking category list that has Program 1, Program 2, Program 3, Administration and Fundraising. Then you can run reports of actual expenses by individual program. You can also create reports to compare actual revenue and expenses against program budgets. Finally, for external reporting in compliance with ASU 2016-14, you can create a report that combines the individual program expenses into a single column and show that next to columns for administration and fundraising.
Before we get into the details of setting up the tracking codes for the functional areas, let’s talk about using the second tracking category that Xero offers. Nonprofits usually need to track revenue and expenses by grant or funder, so we can use that second category to track that. The second tracking category could be called “Grant” or “Funder” and your list would have Funder A, Funder B, Funder C, etc.
If you are not already using tracking categories, you can set them up by clicking on Settings, General Settings, and Tracking. From there you will click the “Add Tracking Category” button. Then you will name the Category and add each individual Tracking Option. Using our first example above, you would end up with a list like this:
Once you have set up the functional area tracking codes, you click the “Add Tracking Category” button again to name the second category and enter the list of names of grants or funders. Note that you can edit the names at any time and can add new tracking codes as new grants are received or new programs started. However, be aware that once a category code has had revenue or expenses assigned to it, you can’t delete the code, although you can archive it.
Now that you have the two tracking categories set up, each time you enter a transaction you will assign it to one of the Functional Area categories and one of the Grant/Funder categories. It is important that you select one option from each category and never leave a transaction unassigned.
Pro-tip 1: if you have revenue and expenses that do not need to be tracked by funder, then I recommend creating a Funder category of “Unrestricted Funds” and coding all transactions that do not need to be specifically assigned to a Funder, to that category.
When entering transactions, you can split an amount across multiple programs and/or funders. For example, a bill for printing costs that includes Administration expenses and Program expenses might be entered like this:
Pro Tip 2: You might have expenses that can’t be directly assigned to a program, but need to be allocated across all programs, based on a variable criterion. For example, maybe you allocate phone expenses each month based on the total personnel cost. In that case, I recommend creating a Functional Area tracking code called “To Be Allocated” and, at the time of initial entry, coding the phone expense to that tracking option. Then, at the end of each month, you can enter a journal to allocate the phone expenses out of the “To Be Allocated” category and split it across the other functional areas based on the personnel cost of each program that month.
Pro Tip 3: at the end of each month I recommend running an income statement to show any transactions that were not assigned to a tracking category so that you can re-assign them to the correct category. You can do that by selecting “Unassigned” from the filter drop down list of each tracking category in the income statement report options. Be sure to run one report with the first tracking category set to “Unassigned” and the second to “Do Not Filter”, then run the report again with the first category set to “Do Not Filter” and the second to “Unassigned”. Here is how the first report should be setup:
By using the two Xero Tracking Categories as I have described above, you can now create a Statement of Functional expenses with just a few mouse clicks. You can also prepare an income statement by program or by funder in real-time.
Kevin Matthews
Author Bio: Kevin Matthews, FCCA CFE, is the owner and President of Noble Accounting, LLC, a firm that specializes in providing accounting and CFO services to nonprofit organizations nationwide, using the latest cloud based technologies. Kevin is a local Xero Ambassador for Los Angeles, CA.
Twitter: @NobleAcctng