Ronald Hudson - Fotolia

An independent contractor software developer cash flow guide

Cash management is a big part of your role as an independent software developer. Learn how to properly manage your funds and cash flow with these tips.

For the experienced software developer, the lure of the gig economy is hard to ignore. The money can be quite good, and you gain the freedom to choose how to use your time. However, the gig economy can turn into a road to ruin if you don't know how to manage your cash flow.

Some people who work as an independent contractor software developer are fortunate enough to land a long-term contract that provides the security of a steady paycheck that goes with this type of employment. But for other independent contractor software developers who work on shorter projects -- say, for a month or two -- or support multiple clients a month, they'll need to be sure that there's enough money to cover expenses and keep food in the refrigerator when business is slow. Thus, it's important to master cash flow management.

Make the most of your money

Cash flow management requires you to make sure there's cash on hand to pay the bills when revenue is down. You might need to plan income on a quarterly, or even yearly, basis.

There is a whole area of the business world that accepts breaking even or potentially losing money during certain times of the year, with the hope that they make it back and then some during peak times. Florists, for example, will break even for most the year and make their profits in February, May and June, when Valentine's Day and wedding season come around. Bars that are situated around ballparks and stadiums wait for the playing season to start to turn a profit. And many big-box retailers will lose money until Black Friday when the holiday buying season kicks off. These types of businesses know there's money to be made -- eventually. As a result, they prepare for those profitable times when sales are low.

The same can be said for an independent contractor software developer. There will be ups and downs for business and moneymaking. You could make upwards of $100,000 in a year, but that doesn't necessarily translate into an even revenue breakdown of around $8,300 a month or $25,000 a quarter.

Your revenue will vary. You could make $10,000 in the first quarter, $20,000 in the second, $30,000 in the third and a whopping $40,000 in the fourth, when IT departments try to exhaust their budgets before the end of the year. Regardless of the ups and downs of your yearly business, you'll have expenses that need to be covered. So, what do you do?

Keep cash on hand

This is where the notion of cash on hand comes into play. Cash on hand describes the available funds you need to cover various expenses. For example, if your monthly revenue fluctuates between $5,000 and $6,000 and your monthly expenses hover around $2,000, having $5,000 in the bank will get you through slow periods -- even if your revenue drops to zero. However, if your revenue bounces between $5,000 and $20,000 per month and your expenses sit around $6,000, you'll probably want closer to $15,000 on hand.

Without the right amount of available cash, you run the risk of going out of business.

Please keep in mind these numbers are only for illustration purposes. Each person's projected cash flow will be different, and the same can be said about their cash-on-hand requirements.

If you need help to determine how much cash on hand you need, a good place to start would be your bank. One way that banks make money is by helping you make money. As you and your banker review your cash flow requirements, you might find that it makes sense to finance the needed cash on hand with a revolving line of credit. If you have a good credit score, a history of revenue and some working capital, you might find the bank to be a willing partner.

Remember, if you're an independent contractor software developer, for all intents and purposes, you run a small business. You want to make sure that any financing would be to your benefit, such as an interest rate below that of the average credit card. Also, be aware that loan interest may be tax-deductible when you use the money to run a business.

As an independent contractor software developer, you get to decide how to run your life. Your time is your own, but you have more responsibility. You're in charge of your skills, sales and financial resources, which determine whether you make or lose money.

Being a successful independent software developer requires a different way of thinking, particularly around financial management. A good understanding of cash flow will protect you as you move forward on your own. 

Dig Deeper on Professional skills development and career advice

App Architecture
Software Quality
Cloud Computing