How to empower your accounting department with OCR

How to empower your accounting department with OCR

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’s the problem with traditional accounting?

Accounting departments handle and process various financial documents such as invoices, receipts, or purchase orders as part of their daily workflows. And as a business grows, they have to handle and process a lot of such documents.

Companies tend to have dedicated teams to check financial documents, enter the data into their accounting or ERP software, verify the data against supporting documents, and finally carry out transactions if needed.

For example, a company might need to verify a supplier’s invoice against a purchase order (PO) it had placed, before approving the invoice.

Doing this manually presents several challenges, some of which seem obvious, others may be new to you. That’s why the following section is definitely worth reading.

Long turnaround time 

According to research led by Ardent Partners, it takes on average 8.3 days to manually process an invoice. This is a considerable amount of time that can lead to a delay in payment. A delay that can lead to late payment penalties, but to a delay in the financial update of the company as well.

It is also time that diverts your teams from tasks and actions that are more focused on the financial or creative development of your business.

A financial drain 

A study by Researchgate estimated the cost of manually processing an invoice at €14. Multiply this amount by the number of invoices you have to process. Yes, it is very expensive. Yes, it is an enormous amount of money. 

Higher risk of error 

Every repetitive task, such as manually copying data from invoices and receipts, inevitably leads to errors. And these errors can have costly consequences. You may, for example, misfile your business taxes and receive a fine. These errors stem from the fact that manual data entry is a tedious task and humans are easily distracted by nature.

The risk of losing invoices

With the constant back and forth between different teams, losing an invoice is commonplace. According to a study by the IOFM, 39.5% of the 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.

Room for 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.

In addition, how can you detect that a figure or item on the invoice has been altered? Fraudsters, for example, may change the bank account or the total amount to be paid. If done skillfully, it’s almost impossible to detect such attempts with the human eye. As a result, you can include fraudulent information or record the same invoice twice. 

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.

The use of OCR in accounting 

Put an end to paper-covered desks, exhausted accountants and blushing screens, 

headaches, and endless calculations. Using an OCR solution for accounting means automating the processing of invoices, receipts, and other financial documents. You’ll give your business a huge efficiency boost and see your productivity improve.

Optical Character Recognition, or OCR, is a technology that transforms any handwritten or typed text into digital text. Once recognized and extracted, the data is structured and ready to be processed in your accounting or ERP program.

This means that you can digitize financial documents and automate their processing and management. But why should you do that in the first place? What are the advantages to your business?

The benefits of OCR for 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. 

3-times faster invoice processing time

OCR software saves time as it greatly reduces the amount of time spent on paperwork, mainly in the area of manual data entry. Information can now be easily 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. 

Definite savings up to 75%

By eliminating the inefficient processes of manual data entry and verification, you can reduce operational costs by up to 75%. You can cut the cost of getting people to work on data-related aspects of accounting. In addition, it enables you to eliminate related document storage and processing costs.

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.

Improved scalability

Of course, at low volumes, it’s totally fine to have a finance employee manually processing 50 invoices per month. But what happens if you need to process and approve thousands of invoices per month? Will you scale your finance team from 1 to 100 people, or will you try to automate this task?

By implementing an automated solution, companies gain control over their overhead costs and lower the operational complexity that arises with scale. Also, software vendors can automatically scale their servers on-demand without any additional recruitment, office space, contracts, and so on.

Now that you know a thing or two about the benefits of using OCR for accounting, the last question to answer is how it works. In the following section, we will guide you through the different steps of the process.

How does OCR software for accounting work?

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. 

Automate your accounting with Klippa

Throughout this article, we have discussed the benefits and functionalities of OCR software for accounting. But understanding how it can be adapted to your specific use case and smoothly integrated into existing operations is another thing.

This is where we can help you out. Our Intelligent Document Processing solution, Klippa DocHorizon, can be integrated via the Klippa API or SDK. As it is created in a developer-friendly way, our components can easily be integrated into the existing software of an organization.

Also, because our solution is well documented, developers will find all the information they need to successfully implement it. That way, the Klippa solution can be integrated within a day.

If you are looking for a solution that relieves your accounting department from daunting and repetitive work, then look no further. Get in touch with us by filling in the demo form below or contact us today.

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