Invoice management is at the core of accounts payable (AP) for small businesses.

However, adopting electronic invoicing (e-invoicing) has become one of the top challenges that small businesses face while processing high volume invoice transactions from their suppliers or trading partners.

There are several factors that contribute to this challenge, including

  • Lack of IT resources
  • Not enough awareness of use cases
  • No industry-led effort to facilitate change for implementing new technologies

As a result, 62 percent of small businesses process their invoices on paper, which not only slows down the accounts payable process, it also leads to human keying errors that ultimately result in irregularities in financial data.

For example, what seems like a simple typo, e.g., entering $8.00034 from an invoice into your accounting ledger instead of $8,000.34, appears as a loss of $7922.33 on your statement.

Automation technologies, such as optical character recognition (OCR), could be the key to a small business digital transformation, increasing the speed and data accuracy of converting paper-based invoices into digital records.

Small businesses that don’t adopt a digital invoice process through automation technologies, such as OCR, face higher costs in staffing needs for manual data entry, as well as lower customer satisfaction and poor tax compliance due to irregularities in financial data.

Read this article to get an overview of OCR, its applications, trends, benefits, and key factors for small businesses to consider as they embark on their digital accounting transformation.

Optical character recognition turns text and images into usable data

In a nutshell, OCR is software that recognizes printed and handwritten alphanumeric characters on paper—such as a paper invoice—by scanning them through an optical device and converting the characters to a computer-readable format.

OCR software is not an invoice management platform on its own, and should be used for converting paper-based invoices to digital formats, rather than processing information on an invoice.

Fields in an invoice that can be captured with optical character recognition

Example of a typical invoice template with details that need to be captured in an accounting platform. The image above highlights some of the key parameters from the invoice that OCR software can capture to speed up the accounts payable process (Source)

A brief history of OCR:

  • Ever since its inception in the 1990s, OCR has proven to be a cost-effective technology for reducing costs, manual data entry from paper-based records including passport, invoices, bank statements, computerized receipts, business cards, emails, and more.
  • Despite being an older technology concept, data extraction technologies, including OCR, are still relevant today, since 97 percent of small businesses still use paper checks.
  • More recently, the term “intelligent character recognition” (ICR) has been used as an extension of OCR technology to recognize only handwritten text in bank forms, mortgage loans, and other documents that require processing handwritten forms into electronic records.

OCR differs from other automation technologies, like robotic process automation (RPA), as its primary purpose is recognition of characters on paper and storing data in a digital format. RPA, on the other hand, is mainly concerned with data transfer from one source to another.

Unlike optical character recognition (OCR), intelligent character recognition (ICR) is specifically designed to recognize handwritten text. When considering OCR or ICR software, consider the volume of printed text versus handwritten text to decide on the purchase of either OCR or ICR software.

How does optical character recognition work?

An optical scanning device (hand-held or a printer scanning device) scans a paper document (e.g., an invoice), recognizes the printed text, and transfers the information to an OCR platform (e.g., accounting software) which translates the text to into digital format.

Optical character recognition process for small business invoice management

optical character recognition process for small business invoice management

OCR technology is getting smarter with AI

Artificial intelligence (AI) technologies and computer vision (CV) have changed the way OCR can convert paper-based characters to digitized formats by improving speed-to-accuracy significantly.

AI technologies, such as deep learning and digital neural networks, provide new methodologies in OCR text recognition through which the software can actually learn the pattern of printed text in documents and minimize recognition errors.

Developments in AI and computer vision technologies have led to new capabilities in optical character recognition, moving beyond text recognition and using cognitive technologies to interpret text more accurately.

What do these advancements in OCR mean for small business accounting?

AI and CV in OCR will help accountants and finance managers process invoices and other critical accounting documents with greater accuracy and speed because the character recognition is based on pattern recognition instead of magnetic ink reading.

With AI and CV, OCR software learns more and gets better at text-based recognition each time a paper-based invoice is scanned, continually improving the accuracy of data capture.

Primary benefits of using OCR are in invoice management

Benefits of OCR for small business invoice processing range from significant cost savings to increased quality of invoice data capture and elimination of human input errors.

With OCR, small businesses can focus on more critical aspects of managing accounts payable (AP) such as cash flow management, while automating mundane, time-consuming data entry tasks.

Here are some of the key benefits of using OCR for your invoice management:

  • Improved workflow for document management with data stored digitally in a central location to facilitate collaboration across the finance department and the organization.
  • Enhanced collaboration and accessibility of digital invoices in PDF or other file formats.
  • Boosts productivity for managing accounts payable by eliminating manual data entry.
  • Higher data accuracy by removing human keying errors, since the invoices are scanned by an OCR software.
  • In-depth data analysis for accounts payable with real-time information on invoices owed to clients.
  • Enhanced security of client confidential financial data.

These benefits can help you increase profits in your accounts payable department. But what are some of best practices you should keep in mind when deciding whether adopting OCR technology for invoice management is right for you?

3 factors to consider when purchasing OCR software

Here are three recommendation/methods to boost invoice management with an OCR software:

Consider volume of invoices vs. speed and accuracy of invoice management

Invoice volume is one factor to consider before you implement OCR for invoice management. If the process of manually entering invoice information is leading to errors in your accounting ledger, then consider adopting an OCR platform.

undefined Failing to adopt OCR for high volume invoice transactions will lead to manual data entry errors, which will result in errors and critical compliance issues. For example, inaccurate reporting based on Generally Accepted Accounting Principles (GAAP) accounting standards.

undefined Choose OCR software that recognizes invoice text in multiple languages

If your small business processes invoices from international clients and vendors, then opt for OCR software that either autodetects the language or supports multiple language recognition.

Most OCR software is not intended to translate one language to another. However, there are OCR platforms that can translate to the desired output language. For more language options, OCR software can also integrate with language tools such as translation software for an extensive library of language options to choose from.

undefined Failing to choose an OCR tool with adequate language support could result in errors in the final data set, which will ultimately affect your accounts payable with incorrect financial data and potential noncompliance.

Look for integration with accounting or ERP software

OCR software is primarily designed for data recognition and extraction and doesn’t typically offer advanced features for doing complex financial data analysis. While considering OCR options for invoice management, make sure the software will integrate with other accounting or ERP software that you may already have in place for invoice management.

In addition, you can combine OCR with other add-on features, such as PDF export, that can help you collect data from archived invoice documents in PDF format and import it into a database.

undefined Failing to choose OCR software that integrates with your accounting or ERP software could necessitate the purchase of entirely new accounting software.

Next steps and additional resources

Before you implement OCR in your accounts payable processes, be sure to consider the following:

ocr adoption process

For more information on accounting and finance tools check out our additional resources on GetApp:

  • Want to know what else the future of accounting holds? Click here to see our infographic.

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