When you start looking into automating your accounts payable workflow, you’ll notice common features across AP software systems: tax form processing, electronic funds transfers, and of course, OCR invoice processing. It’s all part of the AP process.
Short for Optical Character Recognition, OCR is a technology that converts digital documents into editable files containing searchable text. Various industries that deal with heavy loads of data processing leverage this technology, from medical records to banking and, of course, accounts payable.
For the past several years, accounts payable has been going through an evolution, transforming from a cost center into a revenue-generating driver. OCR technology and automated invoice processing are essential to the conversion.
Every automated accounts payable system has OCR invoice processing capabilities. The functionality enables AP software to automatically extract data from digital invoices, eliminating the need for manual data entry. Sounds great, right? However, invoice recognition software alone isn’t enough to entirely transform your accounts payable system into a dynamic workflow that helps you scale.
In this article, we take a closer look at OCR invoice processing, including what it is, how it works, the key benefits, and the top accounting software solutions you can count on today.
What is Invoice OCR?
Invoice OCR is the process of extracting data from digital documents such as invoices and other accounting paperwork, and converting them into searchable and editable text.
Invoice OCR software works by scanning read-only documents such as PDFs and images, recognizing and extracting critical information, and converting that information into editable text.
How Does OCR Invoice Processing Work?
Optical character recognition (OCR) invoice processing automates the extraction of invoice data (otherwise called data capture). It’s essentially “capturing” the data from financial documents and converting it to pure information in real time.
Here’s a quick step-by-step for how invoice automation and OCR technology work:
#1) Scanning and Uploading
Invoices and other document types are scanned or digitally uploaded into the OCR software. Since many companies now receive invoices electronically, it streamlines this process.
#2) Image Preprocessing
The document processing software will then attempt to improve the quality of the scanned image (typically a paper invoice). This may involve tasks like image enhancement, noise removal, rotation correction, and more.
#3) Text Recognition
Through AP automation, OCR technology will then perform optical character recognition on the document, eliminating the need for manual processes like data entry.
The system will scan the image for text characters and automatically convert it into machine-readable text. This can include details from a manual invoice, like:
- Due date
- Invoice date
- Line items
- Invoice total
It may also indicate any early payment discounts that vendor invoices will list to elicit early payments. The technology uses predefined templates and machine learning algorithms to identify and extract data points.
#4) Data Validations and Verifications
Many OCR systems have built-in validation rules to ensure consistency and accuracy of the extracted data.
For example, it may validate that the invoice total matches the sum of line items. This is a task the AP team or payable department would have to accomplish otherwise.
In some instances, the extracted data will still need to be validated via manual verification. Human operators review the results, make the necessary adjustments, and resolve discrepancies.
#5) Data Export
Once the data is accurately extracted and verified, it’s exported to an accounting or enterprise resource planning (ERP system) for further processing and payment.
The original invoice, along with the extracted data, is archived for auditing and reference purposes.
OCR Invoice Processing Methods
OCR invoice processing can be achieved using a variety of methods. This includes:
In this method, predefined templates are created for known vendors to extract data. It works well for consistent invoice formats.
This approach uses ML algorithms to recognize and extract data from invoices without relying on fixed templates. It’s more adaptable to varying invoice layouts.
Some companies opt for cloud-based OCR solutions. These can be accessed remotely and are often more flexible and scalable.
Other companies prefer on-premises OCR tools for compliance and data security reasons.
The Benefits of OCR for Accounts Payable
OCR invoice processing helps a business automate invoice data entry, improve efficiency, and reduce manual errors. It minimizes risks, saves time and resources, and provides better control over financial data management. Here are a few of the top benefits for OCR invoice processing today:
OCR leads to a higher rate of accuracy and minimizes the risk of human errors in data entry. It ensures data is captured correctly, leading to more precise financial records and payments.
Efficiency and Time Savings
Since OCR automates the extraction of data from invoices, it reduces the need for human intervention. This significantly speeds up the processing of invoices. They can be managed faster, allowing companies to take advantage of early payment discounts and avoid late payment penalties.
Many OCR tools include validation rules to check for discrepancies or inconsistencies in extracted data, further reducing errors.
By automating data entry and validation, OCR reduces the need for manual labor, which can significantly reduce costs. Faster invoice processing also leads to fewer late payment penalties, another area for cost savings.
OCR solutions often include robust archiving and document management features. This helps to maintain an audit trail of all financial transactions and ensures total compliance with regulatory requirements.
Improved Vendor Relationships
Prompt invoice processing means happier vendors and suppliers. This can potentially lead to better payment terms and discounts.
- Data Security: Storing invoices electronically can enhance data security and access control.
- Searchability: OCR invoices are digitized and easily searchable, making them easier to audit.
- Scalability: OCR tools can manage a high volume of invoices, making it a scalable solution.
- Data Insights: OCR systems can generate reports and provide insights into accounts payable processes.
- Remote Access: Cloud-based OCR can work with invoices with various formats and layouts, from anywhere.
Do you need complete, integrated processing for accounts payable?
The Few Limitations of OCR Invoice Processing
OCR invoice processing is a powerful tool that has transformed the AP workflow. Without OCR, a digital invoice has limited capabilities. Accounts payable could send a digital invoice via email to an approver, but processing the digital invoice still requires manual data entry. Thus the importance of OCR.
However, like any technology on the market, there are a few small limitations to consider. OCR extracts data from PDFs, removing the need for manual data entry. Retrieving data from an invoice is one thing, placing data into the correct fields in an accounts payable system is another.
Consider this: invoices are required to state the amount due, payment due date, date of invoice, description of goods or services purchased, and the payee identification information, such as address, tax identification, or phone number. That being said, the format of the invoice will differ among payees.
Some vendors use invoice software to generate invoices, while others make their own with a word processing program. The different invoice formats present a challenge: while OCR can extract data from a digital file, OCR doesn’t intuitively know what the data means.
Invoice data extraction is not enough. You need a system that can read invoice images, and then transfer that data from the invoice to your AP software system with little or no oversight; otherwise, your accounts payable process remains static.
How OCR Invoice Processing and Machine Learning Work Together
Machine learning is a subset of artificial intelligence, allowing software applications to solve ongoing problems by analyzing data with little intervention. OCR extracts the data while machine learning analyzes the structure of an invoice for patterns.
Together, these two tools are able to discern the data, such as knowing the difference between an address number and the amount due. The technologies enable an AP software platform to place the invoice data into the correct fields for processing within the system.
Automated ML tasks can include:
- Match up the correct general ledger codes to a specific vendor or transaction type
- Transfer invoice information (i.e., invoice number, supplier identification, and amount total) into the automated accounts payable system for payment processing
- Send the invoice without manual effort to the correct approver for sign-off
Additionally, machine learning makes it easy for companies to implement an automated solution quickly.
Traditionally, setting up an automated accounts payable workflow required configuring rule-based logic before launching a new platform; however, machine learning enables the AP software to learn the workflow logic on the job. This means it learns as it performs the work.
Managed Services for Manual Reviews
Although OCR invoice processing and machine learning pretty much eliminate the need to manually input data or manage each step of the AP workflow, the automated features don’t wholly dispel fears.
What if OCR invoice software reads and extracts incorrect invoice amounts? Does the invoice scanning software know what to do when vendor tax information is missing?
When considering an automated accounts payable solution, look for a platform that addresses one-off situations. For example, the AP platform could offer a managed service dedicated to conducting manual reviews of invoices.
When invoice scanning software triggers an alert (such as missing vendor tax identification), the AP system automatically routes the invoice to the managed service team for review. It doesn’t add to the work of your accounts payable staff. Manual intervention from your company is not required, thus creating an accounts payable workflow that’s touchless.
Global OCR Invoice Processing
OCR invoice processing, machine learning, and managed services make for a triple threat when it comes to a dynamic automated accounts payable system, but companies should also consider how the platform will fare as more payees or vendors onboard.
If your invoice recognition software can process data from a variety of languages, you can expand your business beyond domestic operations.
Along the same vein, cloud-based software allows companies to add multiple users with ease and enables businesses to run operations from anywhere. Instead of installing invoice capture software on-premise, businesses that opt for a cloud-based platform allow anyone with an internet connection to access the automated accounts payable system.
It’s understandable to feel that the numerous software solutions for an automated accounts payable system sound all the same. However, the difference lies in the details, particularly in how they leverage various technologies to address repetitive tasks dynamically.
OCR invoice processing, machine learning, and managed services all work together to transform an AP workflow, creating “touchless” invoice processing and freeing up your accounts payable to focus on tasks that require the human touch like customer-facing issues or revenue-generating initiatives.
Tipalti’s Invoice Management Solution
One of the best accounting systems for OCR invoice processing is Tipalti. The platform offers complete integrated processing for all of your accounts payable needs. Here are just some of the various AP processing tasks that Tipalti can accomplish:
- Invoice capture
- OCR technology
- Invoice verification
- Purchase order matching
- Invoice approval workflows
- Multi-level approvals
Tax and Compliance
- Tax compliance
- Regulatory compliance
- Payment processing
- Global payments
- Self-service portal
- Supplier management
Reporting and Analytics
- Financial insights
- Document management
Summing it Up
OCR invoice processing has emerged as a transformative technology that empowers your AP team to focus on higher-value tasks. Its ability to automate such labor-intensive, time-consuming, error-prone tasks, offers companies a range of benefits.
From cost reductions to efficiency gains, improved accuracy, and compliance, OCR invoice processing is helping to pave the way for more competitive and agile financial workflows.
Today’s AP teams carry more responsibility than ever. If you’re trying to scale, every task becomes inexplicably tied to investment versus reward. To future-proof your business, a modern, forward-thinking team needs to consider all aspects of automation. Ready to get started? Read more in The Ultimate Accounts Payable Survival Guide.