In businesses specifically, excess liquidity is generally a sign that the company is being too risk-averse, and failing to invest in new ventures such as research that carry risk but can also yield great rewards.

Total Reserves = Cash in vault + Deposits at Fed.

1. Required Reserves = RR x Liabilities.
2. Excess Reserves = Total Reserves – Required Reserves.
3. Change in Money Supply = initial Excess Reserves x Money Multiplier.
4. Money Multiplier = 1 / RR.

Cash reserves requirements are intended to ensure that every bank can meet any large and unexpected demand for withdrawals. Bank reserves are the minimal amounts of cash that banks are required to keep on hand in case of unexpected demand.

Why is it important to have sufficient liquidity during a weak economy? Maintaining more liquidity is costly because liquid assets tend to offer relatively low returns. For example, you can retain all of your assets in a checking account and will have very liquid assets, but you will not earn any return on your assets.

In general, you want to keep cash reserves equal to three to six months of expenses. The idea is that these funds should be enough to meet your obligations even in months when you have no cash inflow.

An alternative method is to pay yourself based on your profits. The SBA reports that most small business owners limit their salaries to 50 percent of profits, Singer said.

When you do pay yourself, you just write out a check to yourself for the amount of money you want to withdraw from the business and characterize it as owner’s equity or a disbursement. Then deposit the check in your personal checking or savings account. Remember this is “profit” being withdrawn, not a salary.