The Reconciliation Process

CAPACITY replicates the existing projections via a two-stage process. The model is designed to accept a set of financial projections from the housing association’s own business plan together with a simplified set of key modelling/forecasting assumptions eg inflation, average rents, new unit developments. The model will then, as a first step, generate its own set of forecast financial statements from the set of input forecasting assumptions.

This is exactly the same routine as for generating an original forecast except that some of the modelling assumptions are derived from the input financial statements rather than being directly input. See How the Forecast Works for a more detailed discussion of the forecasting routines.

These “first-step” financial projections, which are not seen by the user, will inevitably differ in detail from the RSL originals because the CAPACITY model will invariably be much simpler than the association's own business planning model.

These differences will be quantified by the model as absolute or percentage reconciliation factors, designed to catch "real growth" issues present in the associations own model but not in the CAPACITY model. These could be steady annual increments or occasional "step change" adjustments.

The second step incorporates the reconciliation factors into the forecast, thereby capturing the "real growth" issues in the unflexed forecast but also maintaining them in any flexed forecasts.

As discussed above it is inevitable that the unadjusted forecasts will be different from those produced by housing associations. The size of the reconciliation factors, therefore, is not a measure of the efficiency or effectiveness of the CAPACITY model. They simply quantify the output differences between two models which may well have quite different structures and forecasting logic.

Analysis of the myriad reconciliation factors will assist in identifying any forecast items where a particular housing association has unique factors built into its model eg a balance sheet accounting adjustment, a "one-off" increase in overheads, an imbalance resulting from an input error, or an annual real growth increment in expenses not included in the assumptions. Over time such analyses will also facilitate identification of areas where the CAPACITY model is generally less detailed than those of the associations being analysed and might be improved by further elaboration.