Practical Grant Tracking Workarounds in Xero for Biotech and Deeptech Startups

The Core Challenge: Why It's Hard to Track Government Grants in Xero

For a deeptech or biotech startup, securing a major government grant is a milestone that validates your research and extends your runway. The initial celebration, however, often gives way to an administrative headache. Your existing accounting setup in Xero, perfect for tracking subscriptions and payroll, suddenly feels inadequate. The grant comes with strict rules on how funds can be spent, tracked, and reported, forcing many teams back to manual, error-prone spreadsheets to bridge the gap. Losing visibility of which expense belongs to which grant can lead to overspending or, worse, missing out on crucial reimbursement claims. The challenge isn't just about bookkeeping; it's about maintaining funder confidence and ensuring every dollar of non-dilutive funding is properly accounted for, a critical task when you do not have a full-time finance team to manage it.

The fundamental issue is one of design. The reality for most pre-seed to Series B startups is more pragmatic: your accounting system was chosen for its simplicity in managing day-to-day business operations. Xero is designed for standard business profit and loss tracking, not the project-based, restricted-fund accounting required by grants. It excels at showing your company’s overall financial health, but it was not built to isolate and report on a specific pool of restricted funds tied to a project with its own budget and rules.

This leads to the ‘One Chart of Accounts’ problem. You might have a line item for ‘Lab Consumables’, but a funder, whether it is the NIH in the US or Innovate UK, needs to see exactly which of those consumables were purchased with their grant money. Co-mingling grant expenses with general operational costs in the same accounts without a clear tagging system makes this separation nearly impossible. This mismatch is why Xero’s native reports do not meet most funder-specific reporting formats, making milestone or R&D tax credit claims a slow and manual process that invites allocation errors.

Option 1: A Simple Method for Xero Grant Management Using Tracking Categories

For a startup tackling its first grant, the goal is an effective system, not a perfect one. Xero’s Tracking Categories offer a straightforward way to achieve this. Think of them as simple tags you can apply to every transaction, from invoices to bills and expense claims. While powerful, it is important to know that Xero limits users to two active tracking categories. For grant management, you can dedicate one of these to your funding sources.

Here’s how to set it up for effective Xero grant compliance:

1. Create a Category: In your advanced accounting settings, create a tracking category named “Funding Source” or “Grant.” This will serve as your primary organizational tool.
2. Add Category Options: Under this category, add each of your specific grants as an option (e.g., “Innovate UK Grant #123,” “SBIR Phase I #456”). It is crucial to also add an “Unrestricted” or “Company Funded” option. This ensures every single transaction gets categorized, preventing data gaps and providing a complete financial picture.
3. Tag All Relevant Transactions: Now, as your team enters bills or reconciles bank transactions, they must select the appropriate grant from the “Funding Source” dropdown. A bill from a supplier for lab reagents used for the Innovate UK project would be tagged to “Innovate UK Grant #123.”

This method is simple to implement and enforce. Using Tracking Categories provides about 80% of the visibility needed with only 20% of the setup effort for a first grant. It is a pragmatic solution that immediately improves Xero grant management. The main limitation is its handling of personnel costs. It is excellent for direct expenses, but it does not have a built-in mechanism to allocate a portion of a team member’s salary to a grant based on time spent. This is a common requirement for reimbursement and a significant drawback for research-intensive projects.

Option 2: A Robust Approach Using Xero Projects for Grant Accounting

When you graduate to managing multiple grants, or a single complex, multi-year grant, you will likely need a more powerful solution. Xero Projects is the next logical step, acting as a light-duty project accounting module within Xero. It is the right choice when tracking categories become too simplistic for your Xero funding tracking needs. Be aware that Xero Projects has an additional per-user cost, so it represents a step up in both capability and investment.

With Projects, each grant becomes a distinct ‘Project’. You can then assign revenue and expenses directly to it, track time against it, and even set a budget to monitor your spend against the total grant amount. This solves the major weakness of the tracking category method: allocating personnel costs. It provides a more granular and auditable way to manage grant finances.

Consider a biotech startup using Xero Projects to track a multi-year NIH grant with specific milestones for research and development. They can set up the NIH grant as a Project and create tasks within it like “Preclinical Research” and “Assay Development.” When a scientist purchases a specific enzyme for the assay work, the bill is assigned directly to the NIH Project and the “Assay Development” task. This provides granular visibility that a simple tag cannot.

Furthermore, it streamlines salary reimbursement. Time tracking for salary reimbursement is a common requirement for SBIR/STTR grants. A team member can log their time directly to a grant project. For example, if a researcher spends Monday morning on the SBIR grant, their process would be:

1. Open the Xero Projects mobile or web app.
2. Select the “SBIR Phase I #456” project.
3. Create a time entry for four hours against the “Data Analysis” task.
4. Add a brief description: “Analyzed results from Batch 3 experiment.”

This creates an auditable record connecting a portion of that researcher’s salary directly to the grant. This documentation is essential for simplifying compliance and maximizing reimbursement claims, turning a complex process into a routine administrative task.

Generating Funder-Ready Reports: How to Track Government Grants in Xero

Regardless of the method you choose, the ultimate goal is to generate accurate reports without resorting to spreadsheets. Manual workarounds often introduce allocation errors that can trigger audit issues and jeopardize future grant funding. This is where the work pays off. A disciplined approach inside your accounting software avoids this risk and builds a reliable financial system.

Once your transactions are consistently tagged, creating a grant-specific report is straightforward. To do this, you navigate to the standard Profit and Loss report in Xero. At the top, you will find a ‘Filter’ button. Here, you can select your “Funding Source” tracking category and then choose the specific grant you need to report on. Xero will instantly regenerate the P&L to show only the income and expenses tagged to that grant. After you have configured the report, you can use the 'Save as Custom' feature to name it (e.g., “Innovate UK Grant P&L - Q3”) for quick access next quarter.

In practice, we see that a custom P&L by Tracking Category report can provide 90% of the financial data needed for funder reports like the SF-425 Federal Financial Report in the United States. This same data is invaluable for R&D tax credit claims. For US companies, this provides the documentation needed for R&D capitalization under Section 174. For those in the UK, it supports claims for the HMRC R&D scheme. The system also supports compliance with accounting standards like IAS 20, which covers government grant recognition under IFRS.

Decision Framework: Choosing Between Tracking Categories and Xero Projects

Which workaround is right for your startup right now? The choice comes down to the complexity of your funding and your reporting requirements. A scenario we repeatedly see is startups moving from one method to the other as they grow and their grant portfolio expands.

Choose Tracking Categories if:

• You are managing your first one or two grants.
• Your grant expenses are primarily direct costs like materials and subcontractors, not salary reimbursements.
• You need a simple, low-cost system that your existing team can adopt quickly.
• You want to get 80% of the benefit for 20% of the effort.

Upgrade to Xero Projects if:

• You are managing multiple grants simultaneously, or a single large grant with distinct phases.
• You need to claim personnel costs and require auditable timesheets for salary reimbursement (a key part of Xero grant compliance for SBIR/STTR).
• You need to track budget vs. actual spending for each grant in real-time.
• Your team is large enough to absorb the per-user subscription cost and benefit from the added functionality.

Key Takeaways for Successful Xero Funding Tracking

Successfully managing government grants in Xero does not require a different accounting platform, but it does require a different approach. What founders find actually works is choosing a system and committing to it. The discipline of your team to code every transaction correctly is the linchpin of the entire process.

Start with the simplest method that meets your current needs. For many deeptech and biotech startups, Xero's Tracking Categories are more than sufficient for the first grant. As your funding becomes more complex, you have a clear upgrade path to Xero Projects. Both methods allow you to generate the necessary reports to satisfy funders and meet accounting standards, whether you operate under US GAAP or FRS 102 in the UK.

A good-enough system that is used consistently is infinitely better than a perfect, complex system that is ignored. By implementing one of these workarounds, you build the financial discipline and data infrastructure needed to manage your runway, maintain funder trust, and scale your operations with confidence. For more resources, see the Government Grants & Contract Accounting hub.

Frequently Asked Questions

Q: What is the biggest mistake startups make when tracking grants in Xero?
A: The most common error is inconsistency. Whether you use Tracking Categories or Projects, the system only works if every relevant transaction is categorized correctly from day one. Partial or sporadic tagging creates unreliable data, which defeats the purpose and can lead to reporting errors during audits or funder reviews.

Q: How should I account for grant income in Xero?
A: Typically, you should create a specific income account in your Chart of Accounts for grant revenue. When you receive funds, code the deposit to this account and tag it with the corresponding grant's Tracking Category or Project. This correctly offsets the expenses and provides a clear financial summary for each grant.

Q: Can I use both Tracking Categories and Xero Projects simultaneously?
A: Yes, you can use both, but it can create unnecessary complexity. A better approach is to use Tracking Categories for broad business segments (e.g., R&D vs. G&A) and dedicate Xero Projects exclusively to managing your grants. This keeps the reporting clean and avoids confusion for your team.