According to a study by the International Data Corporation (IDC), the manual entry of invoice data accounts for 30% of the time of accounting departments and bookkeepers. This means that nearly one-third of their time is spent on a task that can easily be automated. A time that is not being used for more value-adding tasks.
When invoices are received by a business, they come in from multiple sources and the data needs to be entered into the accounting system. There can be physical paper invoices, PDF files, Word documents, and countless other formats. The invoices may have line items that need to be extracted from the paperwork as well.
As you already know, invoice processing is time-consuming and tedious, resulting in long turnaround times, human errors, and data security problems. But unfortunately, no one can do without up-to-date bookkeeping and accounting records.
Optical Character Recognition (OCR) software can be the solution to this accounting headache.
In this article, we will explain the benefits of using OCR software for accounting, how it works, and how it can change the way you manage your accounting.
But first, let’s have a look at the problems of the traditional process!
What is OCR in Accounting?
OCR (Optical Character Recognition) is a technology that converts handwritten or typed text into digital data. In accounting, OCR is used to automate the extraction of key information from financial documents, such as invoices, receipts, and purchase orders. This eliminates the need for manual data entry, reduces errors, and accelerates processing times.
By implementing OCR, businesses can digitize financial workflows, enabling greater efficiency, accuracy, and scalability in their accounting processes.
The Challenges of Traditional Accounting Workflows
Accounting departments handle a high volume of financial documents, such as invoices, receipts, and purchase orders. As businesses grow, so does the complexity and volume of these documents, leading to several issues:
1. Long turnaround time
According to research led by Ardent Partners, it takes an average of 8.3 days to manually process an invoice. That’s over a week spent on a single task, which can delay payments and lead to late fees or strained vendor relationships. Beyond that, these delays also keep your team tied up with routine tasks, taking their focus away from more impactful work, like analyzing financial trends or driving business growth.
2. High Operational Costs
A study by Researchgate estimates the cost of manually processing a single invoice at €14. Multiply this by the hundreds or thousands of invoices processed monthly, and the financial burden becomes clear.
3. Increased Risk of Errors
Repetitive tasks, such as manually entering data, often lead to errors. These errors can have costly consequences, from tax filing mistakes to inaccurate financial records. Human distraction and fatigue are key contributors to these issues.
4. Risk of Losing Documents
With the constant back and forth between different teams, losing an invoice is commonplace. According to a study by the IOFM, 39.5% of employees consider lost or misplaced invoices as their main challenge.
These invoices are lost but still need to be honored and integrated into your accounting software. Of course, you only realize this once a reminder has been sent by your creditor, often resulting in late-payment penalties and a damaged relationship.
5. Susceptibility to Fraud
When processing large amounts of invoices, it is difficult to notice invoices that are submitted twice. And even when you can, you already started reading the invoice and processing it. So you waste time again, but this time on a duplicate invoice.
Fraud adds another layer of complexity. Fraudsters can skillfully alter invoice details, such as bank account numbers or total amounts, making changes almost impossible to detect with the human eye. These manipulations can result in duplicate payments, financial losses, or inaccurate records—commonly referred to as invoice fraud.
These are all challenges that stand between you and smooth invoice management. Fortunately, we will discuss how OCR software can act as a remedy in the following paragraphs.
How OCR Software Works for Accounting
OCR for accounting has many interesting use cases with respect to automating document-related workflows. The most common use case for financial documents is OCR for invoices, also known as invoice scanning and automated invoice processing.
To explain the working of the OCR software, we will discuss the three steps in this use case:
- Capturing and uploading the invoice to the OCR software
- Converting the image into a text file
- Parsing TXT into JSON
1. Capturing and uploading the invoice to the OCR software
In the first step of the process, an image or PDF file of an invoice has to be uploaded to the OCR software. This can be done via a mobile- or web application.
The invoice can be uploaded either with or without the background. If the image is sent uncropped (with background), the software will automatically cut out the background.
It is important that the image contains the entire invoice, without any noise and with decent quality to ensure an accurate result. If this is hard to achieve with an existing solution, the image quality can be enhanced by using a mobile scanning SDK.
2. Converting the image into a text file
In the next step, the OCR software automatically converts the image into text (TXT). All the data from the invoice is extracted, but not yet structured. This means it cannot be interpreted by or further processed in other applications yet.
3. Parsing TXT into JSON
In the third step of the process, the software recognizes what each part of the invoice actually is. It will determine which part is, e.g., the invoice number, total amount, the address, or the purchasing date.
It converts the text file into a structured format, such as JSON. JSON is commonly used for transmitting data in web applications, as it is a standard text-based format for the representation of structured data.
From here, it is very easy to process the captured invoice data in your accounting program.
Benefits of Using OCR in Accounting
There are several advantages of using OCR software for accounting. Your employees are no longer burdened with mountains of invoices to process. The process is much easier. The whole process is streamlined and automated.
We will discuss the most important benefits in more detail below.
1. Improved Efficiency
OCR software significantly reduces the time spent on paperwork, particularly in manual data entry. Information can be quickly scanned into digital formats, and data can be extracted from documents much faster.
In fact, the earlier cited research from Ardent Partners found that using an automated solution results in a 3-times faster time to process a single invoice.
2. Cost Savings
By eliminating the inefficient processes of manual data entry and verification, you can reduce operational costs by up to 75%. This includes reducing expenses related to hiring personnel for repetitive tasks and eliminating related document storage and processing costs.
3. Higher Accuracy
OCR software leverages AI algorithms to offer a high degree of accuracy while extracting data from documents. As one small typo in the bookkeeping can lead to dreadful results, this is of utmost importance for accountants.
Most OCR solutions ensure an accuracy rate of over 90%. If you require an accuracy rate as close to 100% as possible, you can choose to include an employee in the process. This is called Human-in-the-Loop (HITL) automation.
With HITL automation, the majority of the work is automated. Based on business rules, such as a confidence score threshold (e.g. lower than 70%) or all invoices from a certain vendor (e.g. because you know they are problematic), you can direct documents to an employee to be checked manually.
In this way, you combine the best of human intelligence with the power of AI and achieve an even higher accuracy level.
4. Enhanced Scalability
For businesses processing thousands of invoices monthly, OCR provides a scalable solution. Unlike hiring and training new staff, OCR can effortlessly handle increasing volumes, reducing overhead costs and complexity. Additionally, software vendors can scale server capacity on demand without additional recruitment or infrastructure investments.
5. Fraud Prevention
OCR helps prevent fraud by identifying potential issues in real-time. Its validation mechanisms can quickly detect duplicate invoices or anomalies, such as altered bank account details or total amounts. By automating these checks, OCR safeguards your accounting records, reduces manual intervention, and ensures the financial integrity of your business processes.
Now that you understand the key advantages of OCR in accounting, let’s explore how a robust solution can bring these benefits to your organization. Such tools are designed to address the unique challenges of accounting workflows, offering features that streamline processes, improve accuracy, and reduce operational costs.
Automate Your Accounting Processes With Klippa DocHorizon
Want to boost efficiency, streamline invoice processing, and cut operational costs? Klippa DocHorizon is your AI-powered OCR solution!
Klippa DocHorizon automates financial document workflows by capturing, recognizing, and converting financial documents, like invoices and receipts, into structured, actionable data. It eliminates manual data entry, reduces errors and ensures compliance, making financial document processing faster and more reliable.
By choosing Klippa DocHorizon, you benefit from:
- Accurate Data Extraction: Extract fields like invoice numbers, amounts, and vendor names with precision.
- Privacy Compliance: Anonymize data and images to meet privacy regulations effortlessly.
- Flexible Output Formats: Convert documents into various formats, like CSV, XML, JSON, or PDF for seamless integration.
- Fraud Prevention: Detect duplicate or altered invoices in real time to protect financial integrity.
- Efficient Document Classification: Efficiently classify and categorize a wide range of financial documents.
- Custom Workflows: Set up business-specific rules to route invoices for manual review or validation as needed.
- Developer-Friendly Integration: With comprehensive documentation, APIs, and SDKs, implementation into existing systems is both quick and hassle-free.
Are you ready to take your accounting processes to the next level? Contact our experts or book a free demo below to see Klippa DocHorizon in action!
FAQ
OCR stands for Optical Character Recognition. This technology identifies and digitizes printed or handwritten text from physical or scanned documents, converting it into editable and searchable digital data. It allows businesses to automate data extraction, reducing time-consuming manual tasks and increasing overall efficiency.
OCR helps accounting departments by automating the extraction of critical information from documents like invoices and receipts. This eliminates the need for manual data entry, significantly reduces errors, and speeds up workflows, enabling teams to focus on high-value tasks and improving overall accuracy.
Yes, modern OCR solutions, like Klippa DocHorizon, use advanced AI algorithms to achieve accuracy rates of over 90%. When paired with Human-in-the-Loop (HITL) automation, accuracy can approach 100% for critical data.
Absolutely. OCR solutions like Klippa DocHorizon offer APIs and SDKs for seamless integration with ERP, CRM, and accounting systems, ensuring minimal disruption.
OCR can handle a wide variety of financial documents, including invoices, receipts, purchase orders, and bank statements, making it versatile for accounting needs.