# How to calculate ltv from balance sheet

Learn how to calculate lifetime value (LTV) from a balance sheet to better understand your business's profitability and customer retention.

## How to Calculate LTV from Balance Sheet

As a business owner, understanding your company’s profitability and customer retention is crucial to long-term success. One metric that can help you achieve this understanding is lifetime value (LTV). LTV calculates the total amount of revenue a customer generates for your business over the course of their relationship with your company. In this article, we’ll walk you through how to calculate LTV from a balance sheet.

### Step 1: Gather Your Balance Sheet

A balance sheet is a financial statement that lists a company’s assets, liabilities, and equity at a specific point in time. To calculate LTV, you’ll need to gather your company’s most recent balance sheet. It’s important to use a balance sheet that’s as current as possible to ensure accuracy in your calculations.

### Step 2: Calculate Your Average Customer Lifespan

Before calculating LTV, you’ll need to determine the average amount of time a customer typically stays loyal to your business. This is called the average customer lifespan. To calculate this, divide the total number of years a customer stays with your business by the total number of customers you’ve had during that time period. For example, if you’ve had 100 customers over the past 3 years and the average customer stays with your business for 2 years, the average customer lifespan is 2 years.

### Step 3: Calculate Your Average Customer Value (ACV)

The next step is to calculate your average customer value (ACV). This is the average amount of revenue each customer generates for your business over the course of their relationship with your company. To do this, divide your total revenue by the number of customers you have. For example, if your business generates \$1 million in revenue per year and has 10,000 customers, the ACV is \$100 per customer.

### Step 4: Calculate Your Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) is the cost of acquiring a new customer. To calculate this, take your total sales and marketing expenses over a specific period (such as a month or year) and divide it by the number of new customers acquired during that same period. For example, if your business spends \$10,000 on sales and marketing in a month and acquires 100 new customers during that same month, the CAC is \$100.

### Step 5: Calculate Your Customer Retention Rate

Your customer retention rate is the percentage of customers who continue to do business with your company over a specific period of time. To calculate this, divide the number of customers you retain over a specific time period by the total number of customers you had at the beginning of that same period. For example, if you had 1,000 customers at the beginning of the year and 900 of those customers still do business with your company at the end of the year, the customer retention rate is 90%.

Now that you have all the necessary information, you can calculate your customer lifetime value (LTV). Multiply the ACV by the average customer lifespan. For example, if the ACV is \$100 and the average customer lifespan is 2 years, the LTV is \$200.

### Step 7: Calculate Your LTV:CAC Ratio

Your LTV:CAC ratio is the ratio of the lifetime value of a customer to the cost of acquiring that customer. To calculate this, divide the LTV by the CAC. For example, if the LTV is \$200 and the CAC is \$100, the LTV:CAC ratio is 2:1.

### Step 8: Analyze Your Results

Your LTV:CAC ratio will give you an idea of the overall profitability of your business. A ratio of 3:1 or higher is generally considered healthy, while a ratio of less than 1:1 may indicate that your business is spending too much on customer acquisition. If your ratio is less than ideal, consider ways to increase customer retention or decrease customer acquisition costs.

By following these steps, you can calculate LTV from a balance sheet to better understand your business’s profitability and customer retention. Remember to use the most current balance sheet available to ensure accurate results.

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