July 16, 2021

Optical Character Recognition vs. Transcription: How Should You Digitize Invoices?

by Lenny DeFranco

Paper invoices are a pain to manage.

Necessary though they may seem, paper invoices get lost. They get torn up. They can become damaged to the point of illegibility, and they have to be filed away in storage boxes for years on end in case the IRS comes knocking. (And if they do show up, good luck finding the exact invoices for the exact dates you’re being audited for.)

These paper invoice grievances have led to the rising popularity of accounts payable (AP) automation. The key to automating AP starts with turning paper invoices into digital files so data can become searchable and kept in one, universal place—a godsend for accountants and bookkeepers trying to stay organized.

There are two common ways to digitize invoices: Optical Character Recognition (OCR) and transcription. In this article, we’ll explore the pros and cons of each, why they matter, and what hospitality business owners should choose for the most efficient process.

What is Optical Character Recognition?

Optical Character Recognition (OCR) is artificial intelligence technology that can differentiate characters within a photo of a real-life document, scanning an image and identifying alphanumeric characters. Depending on the software using the OCR, those characters can then be assembled into words and numbers.

Basically, OCR is the computer’s electronic eye. It giving software the ability to translate, say, an uploaded image of a paper invoice, into a digital version of that invoice.

Image of the front of a black point and shoot camera with an 82mm lens. Like a camera, optical character recognition utilizes the computer's eye to translate the image of a paper document. Software that automates data extraction either uses OCR or transcription, digitizing and converting text.

A different AI technology, called Natural Language Processing (NLP) is about helping a computer understand what all those words are trying to say. OCR is just the computer recognizing, “That’s a 1. And next to that is a 2. And next to that is a capital A.” And so on.

In invoice automation software, users are prompted to upload photos of invoices. OCR scans those photos for both typed and handwritten characters and turns the image into a PDF that reflects the actual document.

Even though you might be hearing the term for the first time, many types of businesses use OCR to convert paper into digital documents. And even postal services around the world—including the United States Postal Service—use OCR to sort mail. 

Benefits of Optical Character Recognition

Efficiency is one of the biggest benefits of OCR technology for businesses: it allows you and your finance team to digitize invoices with speed. 

New OCR technology should also be able to easily recreate tables that are included on paper documents. If you purchase a lot of items from just one vendor, your invoices likely include large tables to show a complete picture of the order along with quantities and prices. OCR should be able to see the table and recreate it exactly as it’s seen. 

OCR is also pretty affordable, making it a great option for businesses who want to automate but might not have a lot of money to invest in technology. And it’s certainly less expensive than investing in human transcription alone.

Disadvantages of Optical Character Recognition

It’s important to note that automatic doesn’t mean accurate.

Like all AI technology, OCR has limitations when it comes to optically understanding the world as well as humans do. Right now, the best OCR solution on the market right now can only offer 98% accuracy. And that’s with legible text in clean lines. When OCR tries to read those handwritten notes scribbled in the corners of your invoices, that accuracy plummets. All together, the accuracy is probably around 80%.

Cartoon of a hand-held digital device mistaking the handwritten text "Beat up Martin" for the words "Eat up Martha."
Don’t let this happen to your invoices.

In other words, OCR’s accuracy by itself is nowhere near close enough for use in financial software.

You have vendors who are depending on you and your team to read their invoices accurately so they get exactly what they’re owed. You have audits to prepare for. When it comes to managing finances, accuracy is non-negotiable. Even two percent inaccuracy is two percent too high.

That’s why every single invoice that’s digitized through OCR must still be checked by human eyes to ensure all characters were captured correctly—and if they weren’t, to correct the digital invoice files manually.

What is transcription?

To transcribe is to put words, thoughts, or data into a written or printed form. Think about the closed captioning on a live TV news broadcast: a real person is behind the scenes transcribing what the newscasters say so folks who are hard of hearing can still understand what’s being said through the text on their screen.

When we talk about invoice transcription, we’re referring to the act of using human labor to recreate physical invoices as digital files.

Benefits of invoice transcription

A lack of human touchpoints is where OCR falls short. Human transcription is much more accurate—and invoice accuracy is key for business owners of all stripes. But the use of real people for invoice digitization is especially beneficial in hospitality, and in businesses that often receive handwritten or otherwise hard-to-read paper invoices from vendors. 

Do you have a local strawberry farm that loves invoicing you on cocktail napkins taken from the back of your bar? A person is going to have a much easier time understanding that “document” than a piece of software that lacks any context for it. Sure, OCR might still be able to parse the digital photo, but a human will have to double-check the automated data extraction.

Disadvantages of invoice transcription

It’s a lot more expensive to pay people to manually recreate invoices than it is to have a piece of software generate them. No surprise there; we’ve estimated that it costs $21.25 in labor to process just one invoice from end to end.

Hospitality businesses simply can’t afford to maintain that status quo, especially in the current climate. Everything from gloves to ketchup is getting more expensive. And labor is getting more expensive, too, as workers seek higher pay and other benefits from employers: leisure and hospitality wages rose by 7.2% between January and May 2021.

Even if you had the money to burn on human transcription and could find the talent to hire, it’s still not a perfect solution. Humans will never be as fast as software when it comes to recreating files—we have the accuracy, but technology like OCR offers speed.

What is the best way to digitize invoices?

OCR offers speed and affordability. Human invoice transcription offers accuracy. So how’s a business owner supposed to choose between the two to digitize invoices when they’re both incomplete solutions?

What if we told you that you don’t have to choose? Best-in-class invoice management systems for hospitality businesses start with smart invoice digitization. 

Here’s how it works:

  • Invoices are submitted to the software via EDI, email, uploads, or photo scans.
  • OCR technology automatically creates digital files of invoices sent via email or photo. (This step is unnecessary for EDI; learn why in this blog.)
  • A team of humans hired by the software company audits the OCR output to ensure accuracy. The digital file is edited to reflect any errors that may have been introduced. (This system is secure and an industry standard.)
  • After it’s verified to be accurate, the invoice is uploaded to the system, and reviewers are notified the file is ready for their approval.

The end result is that every time you open up your existing accounting software, you’re looking at quality data, transcribed correctly.

AP automation uses artificial intelligence to get more efficient with accounts-payable, while ensuring your data is correct. For line-item coding and specificity, choose an OCR-processing software to generate digital files from your paper invoices or financial statements.

Invoice management systems like Ottimate are able to offer the best of both invoice digitization worlds to our customers. With accurate, digitized data at hand, we’re able to offer businesses better insight into spend, more oversight over vendors, and confidence to tackle audits with ease.

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