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.
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