What is OCR invoice processing in accounts payable?

OCR invoice processing is reshaping how businesses approach accounts payable (AP). By automating time-consuming tasks such as data entry and invoice validation, OCR eliminates bottlenecks, reduces errors, and accelerates workflows, ensuring accuracy in AP workflows.

Our guide explains what OCR invoice processing is, how it works, its benefits and limitations, and best practices for implementing it in your AP workflows.

What is OCR invoice processing?

OCR, short for optical character recognition, converts scanned or digital documents into machine-readable text. It identifies and extracts critical information such as dates, totals, and vendor details from invoices, making them both searchable and editable.

This technology underpins invoice OCR, also known as automated invoice scanning. Designed to streamline AP workflows, it digitizes invoices, purchase orders, and receipts, reducing the need for manual data entry.

Instead of your employees manually inputting information, OCR automatically captures key details such as invoice numbers, due dates, and vendor names and integrates them directly into your accounting software or ERP system.

How does OCR invoice processing work?

Most invoice OCR tools follow a standard workflow designed for accuracy and efficiency. Here’s how it works:

1. Invoice receipt and digitization: Invoices (whether paper or digital) are scanned and uploaded into the OCR system to create a digital record. Paper invoices must be scanned at high resolution for accurate text recognition.
2. Image preprocessing: Before extracting text, the OCR system cleans, crops, and enhances the scanned images. This image preprocessing step helps boost recognition accuracy.
3. Text recognition: Next, the OCR software identifies and extracts key information from the processed images. It then converts details such as the invoice number, vendor name, payment terms, and due dates into a machine-readable format.
4. Data validation and verification: The system validates the extracted data to ensure accuracy, checking it against your purchase orders, vendor records, or contracts to detect discrepancies
5. Export and archiving: The system syncs validated invoice data with your ERP or accounting system for proper recordkeeping and payment processing. It securely archives digital invoices and extracted data, creating a searchable and compliant audit trail.

Manual AP process vs. OCR-powered AP process

Manual accounts payable processes are often time-consuming and prone to errors, especially as invoice volumes increase. Teams may spend hours collecting paper invoices and email attachments, entering data into the system by hand, and double-checking details against purchase orders or delivery receipts.

Approvals get bogged down in email chains or paper forms, and payments can be delayed when teams don’t track schedules carefully. On top of that, storing and retrieving paper invoices for audits adds yet another layer of inefficiency.

These bottlenecks make it hard for businesses to keep up, leading to late payments, strained vendor relationships, and wasted time.

OCR invoice processing methods and technologies

There’s more than one way to implement OCR for invoice processing. The best approach depends on the types of invoices your business handles, how much flexibility you need, and whether you prefer a cloud-based or on-prem setup.

Template-based OCR

One common method is template-based OCR, which uses predefined layouts to locate key details such as vendor names or totals in standard invoice formats. This approach is fast and easy to set up, making it ideal for businesses with uniform invoices. However, it’s less effective when invoices vary widely in design since the software may struggle to read unfamiliar layouts.

Machine learning-based OCR

For businesses with more complex documents, machine learning-based OCR is often a better fit. Rather than relying on templates, these systems learn from different invoice formats over time, improving accuracy as they process more data. While machine learning-based OCR requires more initial training, it’s more adaptable and can easily handle variation.

Cloud-based vs. on-prem solutions

Businesses can choose between cloud-based and on-prem deployment. Cloud-based OCR runs on remote servers, scales easily, and integrates well with other cloud tools. On-premises solutions are installed on your own servers and offer more control over data security and compliance, which some organizations prefer despite the higher maintenance costs.

Benefits of OCR invoice processing

The true value of OCR lies in its ability to transform time-consuming AP tasks into seamless, automated workflows that drive impact. The main advantages of OCR in AP include:

• Time savings and reduced manual data entry: OCR eliminates tedious data entry tasks, freeing teams to focus on more strategic work
• Fewer errors and improved data accuracy: Automated validation minimizes the risk of human error and ensures accurate and consistent records
• Cost savings in AP operations: OCR helps lower costs by streamlining your AP process, reducing errors, and avoiding late fees
• Faster invoice approvals and payments: Automated workflows route invoices for quicker approvals and timely payments, helping capture early payment discounts
• Scalability for high invoice volumes: OCR can handle a high volume of invoices without the need for additional resources

Limitations and considerations of OCR invoice processing

Though OCR offers significant advantages, it’s important to understand its limitations and plan accordingly. Some common challenges small businesses encounter include:

• Inconsistent invoice layouts or poor scan quality: OCR works best with clean, standard formats. Invoices with unusual layouts or blurry scans can result in errors or missing fields.
• Errors with handwritten or damaged invoices: OCR struggles to accurately interpret handwriting or invoices that are torn, smudged, or otherwise damaged
• Need for human review in complex cases: For invoices with ambiguous or conflicting information, a human review step is often still necessary to check accuracy

You can often overcome these challenges by using machine learning–based OCR, which gets better at handling variations over time, or by working with managed review services to catch exceptions and handle more complex cases.

Best practices for OCR implementation

If you’re considering OCR invoice processing, it helps to set your team up for success from the start. Here are a few best practices to keep in mind:

• Organize invoice formats: Standardizing layouts reduces variation and improves OCR accuracy from the start
• Use high-quality scans: Clear, high-resolution scans help the software extract data correctly and avoid mistakes
• Validate with a testing phase: Testing OCR on a sample set lets you catch issues and adjust settings before full rollout
• Integrate with ERP/accounting: Connecting OCR to your existing systems ensures end-to-end automation and seamless workflows
• Monitor and update regularly: Ongoing monitoring keeps accuracy high as your business grows and invoice formats change

Case study: How Ramp’s OCR transformed AP at The Second City

Manual processes were slowing down The Second City’s accounts payable team. They needed a system that could keep pace with their operations, but outdated tools created bottlenecks, delays, and costly errors.

Initially, The Second City was using NetSuite Bill Capture. But after implementing Ramp’s OCR technology, it was able to streamline its AP workflow. Ramp Bill Pay automated repetitive tasks such as coding invoices and chasing receipts while seamlessly recognizing vendors, reading line items, and applying accounting rules.

Frank Byers, Controller at The Second City, was initially skeptical.

“When we moved to Bill Pay, I was hesitant because we were promised the same type of functionality as our previous technology, which didn’t work,” Frank said. “But Ramp’s OCR works seamlessly—it not only recognizes the vendor but reads each individual line item and uses accounting rules to code them correctly. That made adopting Ramp Bill Pay a no-brainer.”

The results speak for themselves:

• Expense reporting expedited by 8 days, eliminating operational delays
• $40,000 in annual savings by consolidating systems
• Bills processed twice as fast, freeing up valuable time

Ramp didn’t just fix The Second City’s broken workflows; it redefined them, helping the team focus on the work that matters most.

A month of work done in minutes.

Handle 10x the invoices in half the time. Our standard tier is free.

Try Ramp Bill Pay

Make AP effortless with Ramp’s OCR technology

Not all OCR solutions are created equal. Ramp’s technology goes beyond basic automation, delivering precision, scalability, and seamless integration to transform how your AP team works.

Don’t just take our word for it. Here’s what Frank Byers had to say about Ramp’s impact:

“Switching to Ramp for Bill Pay saved us not only time, but also a significant amount of money. Our previous AP automation tool cost us around $40,000 per year, and it wasn’t even working properly. Ramp is far more functional, and we’re getting the benefits at a fraction of the cost.”

What could your business achieve with all that time and money saved? Try Ramp's invoice management software and see how our OCR technology can help you create a more efficient AP process.