Xero Central will tell you how to create a tracking category. What it will not tell you is how a time-billing agency should actually use them, or how to apply the right one to every invoice line without hand-tagging each push. That is what this guide is for.
The short version
Tracking categories let you slice revenue in Xero by a dimension you choose: client, service line, team or office. Xero allows two active categories at once. Hour Cap applies up to two per invoice line and resolves which option to use across three levels: a per-project override, then a per-invoice default, then your organisation default. Set the default once, override only the exceptions, and your reporting falls into place.
What tracking categories actually do for an agency
An invoice total tells you what you billed. It does not tell you whether your design retainers are more profitable than your development projects, or which team is carrying the revenue. Tracking categories add a reporting dimension to each line so Xero can answer those questions. For a time-billing agency, the categories worth setting up usually fall into a few patterns:
- Service line: Design, Development, Strategy, Support. Tells you which offering earns its keep.
- Team or pod: useful when you want revenue attributed to the group that delivered it.
- Client type or industry: retainer versus project, or sector, so you can see where to focus sales.
- Office or region: for multi-location agencies reporting by branch.
Because Xero supports two active categories, you can combine two of these, for example service line and team, and report on both at once.
Categories sync from Xero on connect
You do not recreate categories in Hour Cap. On the Team plan or above, connect Xero from settings and your tracking categories and their options sync across, alongside contacts, sold items, tax rates, revenue accounts and branding themes. Xero stays the source of truth. If you add an option in Xero later, it comes through on sync, and the connection refreshes its tokens automatically so you are not reconnecting.
The three-level resolution, explained
This is the part that saves real time. Rather than picking a category on every invoice, Hour Cap resolves the right option for each line across three levels, most specific first:
| Level | What it sets | When it wins |
|---|---|---|
| 1. Per-project override | A category option fixed to a specific project | Always, if set. The most specific level. |
| 2. Per-invoice default | A category option chosen on this invoice | When no project override exists |
| 3. Organisation default | A category option that applies to everything by default | When neither of the above is set |
Read it top to bottom: if a project has an override, that wins. If not, the invoice default applies. If neither is set, the organisation default is used. You configure the exception, not the rule.
Resolution order: project override → invoice default → organisation default. The first one that is set decides the category option on the line.
A worked setup
Say you run two active categories: Service Line (Design, Development, Strategy) and Team (Pod A, Pod B). Here is a sensible configuration:
- Set the organisation default for Team to whichever pod bills most, so most invoices are tagged correctly with no extra clicks.
- Leave Service Line without an organisation default, because it genuinely varies by project.
- On each project, set a per-project override for Service Line, since a "Brand refresh" project is always Design and a "Platform build" is always Development.
- Use the per-invoice default only for one-off work that does not fit a project's usual category.
The result: every line that Hour Cap pushes to Xero arrives tagged on both dimensions, and your Xero reports can show revenue by service line crossed with team without any manual tagging.
How it appears on the pushed invoice
When you create an invoice, Hour Cap builds the line items using your chosen grouping mode, resolves the tracking categories per line, and pushes the result to Xero as a draft. Each line carries up to two category options. Because it is a draft, you can open it in Xero and confirm the categories before authorising, the same review step you get for the amounts and tax. If anything looks off, adjust it in Xero or void the draft, which releases the entries to be invoiced again.
Common mistakes to avoid
- Too many categories: Xero gives you two active. Pick the two dimensions you will actually report on rather than trying to track everything.
- No organisation default: without one, lines fall through to untagged when nothing more specific is set. Set a sensible default so the common case is covered.
- Overriding everything per invoice: if you find yourself setting the same option on every invoice, promote it to the organisation default and save the clicks.
- Editing categories only in Hour Cap: manage them in Xero, then sync, so your books stay the source of truth.
Where this fits
Tracking categories are the reporting layer on top of the core flow where you send tracked time to Xero as draft invoices. They pair naturally with tax-correct GST and VAT invoicing and with retainer billing. To read more on the underlying connection, see how Hour Cap pushes time to Xero and the broader guide to tracking billable hours and invoicing through Xero. The Xero integration, including tracking categories, is on the Team plan.