Does Longer Cash Gap Require Greater External Financing?

Components which significantly affect the level of working capital are inventories, accounts receivables and accounts payables. Company must tend to keep inventories at an optimal level and collect receivables as soon as possible since it is important that cash is not tied up in inventories or in receivables. Cash gap represents the difference in days between the days of paying for purchases and days of collecting cash form receivables. Considering that in these days company is without cash, the cash gap must be financed. As higher the cash gap is, more funds are needed. When company is financed from other sources, there is the cost of financing, that is, interest cost. As higher the cash gap is, interest is higher. The starting point of this research is that the relation between the cash gap and the company’s indebtedness is positive, in other words, the higher the cash gap is, liabilities are higher, such as interest cost. The research is conducted on the large entities in the Republic of Croatia for the period from the year 2010 to the year 2015. Cash gap was put in relation with debt indicators such as: financial expense which is interest cost and debt ratio which shows how big part of the company’s asset is financed from external sources. Results showed that although there is weak positive correlation between the cash gap and interest cost, as well as between the cash gap and debt ratio, those correlations are not significant.