OCR for Accounts Payable: How Scanning Software Automates AP
Ira Brooker Written: December 15th, 2020 Updated: May 18th, 2023
An efficient accounts payable process is essential, no matter the size or scope of your organization. Not only does a well-running accounts payable department help you keep an eye on debts in relation to cash flow, it helps prevent delayed payments to vendors and clients, preserving your financial stability and reputation.
One of the easiest ways to achieve that efficiency is by automating as much of the invoicing process as possible—that’s where optical character recognition (OCR) comes in. With OCR, you can reduce bottlenecks in accounts payable and build healthy relationships, all while gaining an accurate view of your company’s performance. Below, we’ll dive deeper into how OCR works, its benefits, and how it can seamlessly integrate into your accounts payable process.
What is OCR?
Optical character recognition (OCR) is a method of recognizing and transforming images of handwritten or printed text into code that computers can analyze – essentially, OCR is the technology that allows computers to read pictures of text. OCR is one of the main data capture methods.
OCR systems are typically a blend of software and hardware. Hardware like scanners create images of the text, while the software processes and transforms the data, often leveraging artificial intelligence to interpret handwriting and special characters.
What is Accounts Payable OCR Scanning?
Optical character recognition (OCR) is a type of technology that converts scanned documents into digitally searchable and editable text. By converting these documents into something that’s machine-readable, it eliminates the need for manually entering the listed information into whatever houses your data, be it Word documents, spreadsheets, databases, etc.
There are many applications for OCR, such as archiving old documents, like newspapers; mobile check deposits; mail sorting; license plate recognition technology; and more.
In the context of accounts payable, organizations usually use OCR software to capture invoice data like product numbers, prices, and payment dates. Though it typically does a good job, the technology isn’t perfect. There are times when it can’t read text for a variety of reasons. Still, using OCR vastly cuts down on the time it takes to process and digitize documents.
How Does OCR Work?
To understand how OCR works, it’s helpful to first think about how we humans are able to perceive text. When we read, our eyes detect patterns of dark and light. Our eyes then send messages relaying these patterns of light and dark to the brain. Then, the brain interprets the patterns and recognizes them as text with associated meaning. While this feedback loop is second nature to you, it’s not for a computer. This is where OCR comes into play.
Just like us, to “read” something, a computer has to “see” it first. But instead of eyes, computers rely on data capture via an OCR system. The system begins by scanning a physical document and converting it into a graphic file. Computers can’t immediately distinguish between this picture of text or any other image. So next, the OCR software picks up on the shading gradients in the file. Light areas signify background whereas dark areas indicate characters.
Now that the system has “seen” the image and its patterns of light and dark, it needs to “read” it to make sense of what’s actually on the page. To do this, the OCR system then analyzes the dark areas further in order to identify letters and digits. This happens in one of two ways: pattern recognition and feature detection.
Pattern recognition works by feeding an OCR algorithm many variations of the same character again and again so that eventually, it can recognize that letter no matter what it looks like. Think about it: Each letter looks slightly different depending on the font or a person’s handwriting. For instance, two different men might be named John Smith, but their signatures probably look very different. But by repeatedly presenting the algorithm with these variations, over time, it’s able to easily recognize each letter.
Feature detection, on the other hand, is based on specific rules regarding (as the term suggests) the features of each character: angled lines, straight lines, curves, etc. These rules dictate what letters or numbers the algorithm will perceive. For example, the lowercase letter “i” might be coded as a vertical line three-fifths of the way up the line with a dot on top. Instead of learning to spot different variations of letters and characters, an OCR algorithm can use these rules—which typically hold true regardless of font or handwriting—to read what it’s seeing.
What are the Benefits of Using OCR in AP Processes?
If you make the smart decision to incorporate OCR into your accounts payable process, you may reap a variety of benefits. You’ll find that OCR:
1. Speeds up the process
On average, it takes anywhere from 24 to 72 hours to process an invoice. In some organizations, it’s not unheard of for invoice processing to take upwards of 12 days. With OCR, however, you can eliminate most data entry tasks and expedite this process significantly. Research shows that top-performing organizations that automated their accounts payable processes can increase their invoice processing cycle speeds by 73%.
2. Produces fewer errors
No matter how skilled or experienced an accounts payable professional may be, invoice processing errors will arise. Human error rates for spreadsheet entry are high, with 95% of business leaders saying that their performance has been harmed by poor data quality. Just one mistake can be costly—even minor mistakes can add up. For instance, AT&T’s cumulative invoicing errors resulted in years of overpaying vendors and likely millions of lost funds. A quality OCR with a high accuracy rate can eliminate human error and the consequences that come with it.
3. Saves money
According to CFO.com, companies that employed highly automated accounts payable processes spent, on average, only $1.42 per invoice, while companies that relied on minimal automation spent more than three times as much, at $6 per invoice. Though OCR is just one piece of the automation puzzle, it can still contribute to those savings in multiple ways.
For starters, the fewer staff members there are working on manual data entry, the more people you can have working on more complex, high-impact tasks. That means spending less on those menial tasks and freeing up resources that you can use elsewhere. Plus, since OCR provides more accurate data, you’ll be able to avoid costly accounts payable issues like paying an invoice twice or missing a due date and getting hit with a late fee.
How Does OCR Work in AP Processes?
Now that we’ve covered what OCR is and how your organization may benefit from it, let’s take a closer look at how it can fit into your accounts payable process. While solutions that employ OCR might differ, the OCR technology itself works the same way:
- An employee scans the invoice: First, someone scans an invoice into an OCR system, making sure to remove any staples or paperclips and to smooth it as best as possible beforehand, to ensure a clean scan.
- OCR software reads the invoice: The software will then use keywords and layout elements to look for the relevant information on the page. If there are any questionable or obstructed fields, an employee may have to manually enter and verify them.
- OCR trains itself: Modern OCR software uses machine learning along with the corrections users make manually to train itself to recognize what it missed in previous scans.
- OCR exports the data: Once all of the fields are good to go, the software will export the data into your ERP system or appropriate accounting database.
AP AUTOMATION DEMO
How OCR Works With Your AP Automation System
As useful and versatile as optical character recognition tools are, getting the most out of OCR requires integration with your larger AP automation system. Paying bills is a vital part of your accounts payable team’s responsibilities, but it’s far from their only role. OCR should be viewed as one important piece of an overall AP automation strategy.
An automation solution such as MHC NorthStar takes a holistic approach to your invoice processing needs. OCR tools play an important role in making that process faster, more cost-effective, and more accurate. A few of the areas where OCR integrates with your invoice processing system include:
Intelligent Invoice Capture
Even for an organization that regularly processes high volumes of invoices, OCR can capture relevant data from a huge range of sources, including invoices sent as a PDF, a Microsoft Word document, an email attachment, or even a scan of a physical document. That data is then entered into your ERP, eliminating the need for time-consuming and error-prone manual data entry processes.
Automated Invoice Processing
OCR tools work with your ERP to automate routing of invoices based on configurable business rules, allowing for touchless, straight-through processing that reduces time spent handling exceptions and journal entry adjustments.
The data extracted during the OCR process provides deep visibility into each stage of invoice processing, allowing you to manage images for all invoices as they move through your system. That helps your team to identify and eliminate bottlenecks, search for invoices, and take more control over cash flow.
How to Really Improve Your AP Processes with OCR
If your organization processes a significant amount of invoices, OCR is invaluable. It can integrate seamlessly into any accounts payable process to save time, money, and headaches down the road.
Keep in mind that while it offers many benefits, you can’t rely solely on OCR. To truly improve accounts payable processes, you must find a solution that pairs OCR with invoice automation capabilities. A solution like MHC NorthStar can seamlessly transfer invoice data to your ERP or accounting database.
MHC’s system employs OCR technology to capture data from scanned papers or emailed invoices and then ports that information directly into your ERP system for an automated, tiered approval system that can be tailored to your workflow.
But this efficiency isn’t confined just to accounts payable. With MHC, you can easily process and track invoices, payments, and other documents essential to the entire procure-to-pay process. Vendors can even have access to a self-service portal to search and track invoices.
Optical Character Recognition (OCR) FAQ
OCR stands for “optical character recognition,” a system for automatically translating images of handwritten or printed text into code that computers can analyze.
An OCR scan involves scanning a physical document and converting it into a graphic file that can be read by a computer. Using shading gradients in the file along with pattern recognition and feature detection, the OCR system can then “read” the text included in the document.
Yes, the shading gradients in most handwriting can be read by an OCR system, allowing the system to process even handwritten documents.
Optical character recognition (OCR) uses machine learning and computer vision to continually improve its functionality.
An invoice that includes the initials OCR was likely processed using optical character recognition.