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Jodi Scarlett’s company, ProStar Cleaning and Restoration Inc., works at the site of a residential cleanup in Canmore, Alta.

Laura Leyshon/The Globe and Mail

Each week, we seek expert advice to help a small or medium-sized business overcome a key issue.

When Jodi Scarlett completed her MBA at the University of Calgary's Haskayne School of Business in 2002, she wanted to go the entrepreneurial route, so she chose a business she already knew well. "I had been working for a franchise maid service and left that to go back to school to finish my MBA," she recalls. "While I was at school, the opportunity arose to buy the assets of an established local cleaning service."

In 2005, Ms. Scarlett added a carpet cleaning service, and two years later she boldly took the plunge into disaster restoration. The expanded business, rebranded as ProStar Cleaning and Restoration Inc., began to remedy damages caused by flooding, sewer backup, fire and smoke, as well as mould, biohazards and odours.

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By 2013, ProStar had 55 employees and was handling jobs worth up to $3-million. "We just grew into these major projects," Ms. Scarlett says. The company developed close relationships with property managers, who would continue to call on ProStar when they moved on to new property management firms.

Annual sales reached $8-million last year, and Ms. Scarlett anticipates $7-million for 2015. "We've had a little less revenue this year because there hasn't been catastrophic flooding in our region." Alberta's epic flood of 2013 was, literally, ProStar's high-water mark. It brought in as much restoration work as the company could handle.

The flooding had additional effects on ProStar, however: The payment cycle has slowed drastically for restoration work performed in the residential condo market, which is ProStar's biggest, accounting for 60 per cent of its revenue.

Payment for restoration work traditionally flowed from the damaged building's insurer to the property manager to the restorer. In the wake of the 2013 flood, however, insurers began to syndicate their coverage among five or six underwriters. Instead of being paid one large cheque for each project, ProStar now has to wait for a series of smaller cheques from multiple payers.

Also, to combat skyrocketing premiums, insurers have raised their deductibles for water damage and flooding. "Where $2,500 and $5,000 deductibles used to be commonplace, we are now seeing deductibles of $10,000 to $50,000," Ms. Scarlett says. "This has also contributed to longer payment times as condo boards are increasingly pressed to fund a greater portion of cleanups themselves."  Click here to see pictures of ProStar at work cleaning up a property.

All these changes have left ProStar facing a more fragmented and drawn-out payments cycle. In the past two years, its accounts receivable have risen on average to 93 from 57 days, and the company has had to increase its line of credit by 50 per cent. It is thus paying extra interest.

In addition, all new assets, such as equipment, vehicles and computers, have to be leased rather than purchased to preserve free cash flow. Investments in training have been delayed or scaled back.

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The great time and effort devoted to managing cash flow has left the company focusing on day-to-day concerns rather than strategic projects.

The Challenge: How can ProStar improve its cash flow?

THE EXPERTS WEIGH IN

Saul Plener, national leader for private company services, PricewaterhouseCoopers LLP, Toronto

ProStar is not likely to encounter tremendous flexibility on the part of insurers, so Ms. Scarlett should try to address her cash flow challenge by dealing directly with homeowners or condo boards on payments. The idea is to reduce her cost of borrowing by speeding up the flow of payments.

This could be accomplished by asking for an upfront deposit or for progress payments as the work is carried out. Either way, it would transfer some of the burden of financing to the client.

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Her success will depend on how strong a brand ProStar has in the marketplace. If I want to use a certain contractor, such as ProStar, I may be willing to make part of my payment upfront. It will also depend on what payment terms ProStar's competitors are offering (they may be having the same cash flow issues as ProStar and therefore be willing to adopt similar payment terms). ProStar could offer a 5-per-cent discount to make its new payment structure more palatable to homeowners. As long as the amount of the discount does not equal or exceed the interest saved on the company's line of credit, the arrangement will work to ProStar's advantage.

ProStar could even go as far as asking its bank to provide financing to its clients to facilitate their speedier payment.

Jim Dewald, dean, Haskayne School of Business, University of Calgary

If ProStar is determined to stay in the markets it is in, then volume is the only way to gain sufficient power to offset the challenges of thin margins and extended payment terms.

To build volume, the firm should first look to expand its investor base, either through acquisition of competitors or by bringing in new investors and using the funds to aggressively grow their business through hypercompetitive pricing or differentiated service.

Ms. Scarlett's job is to assess her best market potential in either (1) extending her strong customer relations to broaden out her services (e.g. regular maintenance, efficiency and safety audits) to existing customers, or (2) extending her team's skills and expertise to broaden out to new customer bases (e.g. commercial and industrial). It is best to flesh out two or three specific options, and assess which of them best fits the firm's core strengths, while considering changing technologies and market conditions.

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Jeff Robson, president of the private equity firm Vada Capital, Calgary

If discounts and upfront payments fail to help ProStar, then it could go after higher-margin jobs in its other service lines. Often as entrepreneurs, we get our heart set on something to the point that we can't see past our drive to make it work.

In order to solve its immediate problem – cash flow – ProStar should stretch out its accounts payable to a timing that will allow some visibility into the future. Cash isn't just about getting through next week; it needs to be viewed in much longer cycles. One of our businesses that has payment terms similar to ProStar's is looked at on a week-by-week basis 16 weeks forward. They forecast what they're going to be bringing in vs. what they're going to pay out on a rolling 16-week cycle. You have to map your cash flow.

It's not acceptable that your clients expect you to have your collections be 90 or 100 days, but vendors expect everything that you pay should be in 30 days. They have to somehow match. Ms. Scarlett should go to her vendors and say, "Here's how our business has changed. I'm not saying I'm going to stretch out my payables to the point where I'm waiting to get paid before I pay you. But my world has changed, and therefore your world has to change, too."

As long as she's consistent and reliable in her new approach, I don't think there's an issue. If she says, "I can no longer pay in 30 days but I'm going to pay in 60 days, and every 60 days you will be paid, then you'll probably say, "Okay, I can live with that."

THREE THINGS THE COMPANY COULD DO NOW

Look past insurers

Turn to homeowners or condo boards for earlier payments, perhaps offering a discount as incentive.

Turn up the volume

Building up the business is a good way to offset the challenges of thin margins and extended payment terms.

Plan for the long term

Go to vendors and make your case for a new payment paradigm.

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Interviews have been edited and condensed.

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