Planning and Goal Setting for Small Business

While we consider the contents of this publication to be of
general merit, its sponsorship by the U.S. Small Business
Administration does not necessarily constitute an endorsement
of the views and opinions of the authors or the products and
services of the companies with which they are affiliated.

All of SBA’s programs and services are extended to the public
on a nondiscriminatory basis.


Many authorities on business management identify the five major
functions of management as

* Planning.
* Organizing.
* Directing.
* Controlling.
* Coordinating.

The planning and controlling functions of management often
receive less attention from the small business owner-manager than
they should. One way to more effectively fulfill these two
functions is through effective goal setting.

The success of a business will depend on its long-range goals for
sales, profits, competitive position, development of personnel
and industrial relations. To accomplish these goals, the company
will need to identify intermediate goals that it can work toward
each year.


Traditionally, people have worked according to descriptions that
list the activities or functions of the job. The management by
objectives (MBO) approach, on the other hand, stresses results.

Let’s look at two examples.

* Suppose a credit manager’s job description states that he or
she will supervise the credit operations of the company. This
description simply lists the functions of the credit manager.
Under the MBO approach, the owner-manager and the credit manager
would identify five or six goals covering important aspects of
the manager’s work. For example, one goal might be to increase
credit sales enough to support the 15 percent increase in sales
expected by the sales department.

* The traditional job description for a personnel specialist may
include conducting a recruiting program for the company. Under
the MBO approach, the personnel specialist would identify five or
six appropriate goals, one of which could be, “Recruit ten new
employees in specified categories by July 1.”

With MBO, jobs are viewed in terms of achievements rather than
simply functions. Activity alone is not enough; each activity
must bring the worker closer to achieving his or her goals.


Understanding the Requirements of an MBO Program

Management by objectives has been used by all kinds of
organizations, but not every business has had the same degree of
success. From examining MBO programs that have worked, it is
clear that all met the following minimum requirements:

* Goals were expressed in specific and measurable terms.

* Each employee proposed 5 to 10 goals to cover those aspects of
his or her job crucial to successful performance.

* A final written statement of each goal was prepared, including
a statement of the goal, method of evaluating the goal, work steps
needed to complete the goal and an estimated time needed to
complete the steps.

* Progress was evaluated at regular intervals (at least quarterly)
and compared with the original goals.

* Problems that hindered progress were identified and corrected.

* Goals were related to each level of management, both those above
and those below.

Defining Your Business

The first step in developing an effective MBO program is to
define your business. Ask yourself the following questions:

* What business am I in?
* Is my definition right for today’s market?
* Do I need to change my business to meet emerging customer needs?

A clear vision of your business is crucial for planning your
marketing, product development, buildings and equipment, and
financial and staff needs. For example, a drop in sales caused a
small business manufacturer of metal trash cans to reexamine its
product. To regain lost sales, the owner decided to redefine the
product as metal “containers” and to develop a new marketing plan.

Setting Goals

Long-range business goals will be the cornerstone of your
company’s MBO program. To achieve these goals, you must have a
method to communicate them to your managers and employees. One
way is to bring managers and employees into the process by asking
them to help formulate the company’s short- and long-range goals.
If they have a role in establishing the goals, they will be more
committed to achieving them.

All goals should relate to and support the long-range objectives
for the company. In this way, you can ensure that the goals of
all levels of management are consistent. If goals are
incompatible, you may find that employees feel like the middle
manager of a research and development company who exclaimed in a
seminar, How can I set my goals when I don’t know where top
management wants to go?

Types of Goals

What areas of your managers’ work are suitable for goal setting?
Ask managers to identify the most important aspects of their
work. In each area, they should set both short- and long-term
goals. Carefully developed goals, if attained, should give the
manager better control of the job. Each manager should define one
or two goals in each of the following categories:

* Regular work goals.
* Problem-solving goals.
* Innovative goals.
* Development goals.

By asking your managers to set at least one goal in each of
these four areas, you may open their eyes to new possibilities
they had not seen before. The goal-setting process can be a very
useful educational step.

Regular Work Goals

These include the major part of the manager’s responsibilities.
For example, the head of production should focus on the quantity,
quality and efficiency of production and the head of marketing
should concentrate on developing and conducting the market
research and sales programs. In defining their regular work
goals, employees should include ways of

* Operating more efficiently.
* Improving the quality of the product or service.
* Expanding the total amount produced or marketed.

Problem-Solving Goals

These provide managers an opportunity to define their major
problems and to set a goal to solve each one. There is no danger
of ever running out of problems; new problems or new versions of
old problems are always present.

Innovative Goals

Because of the push for new products and new methods in today’s
marketplace, innovation now gets much attention in seminars and
publications for top managers. Managers and workers should seek
new and better production methods, explore better ways to serve
customers and propose new products for the company. Managers will
need to use innovative approaches to make the company competitive
in a fast-changing national and international economic

Development Goals

In setting development goals, you and your managers recognize the
importance of acquiring new skills. Managers should plan for the
continued growth of each employee, both in technical areas and in
work relations with fellow employees.

Devising a Work Plan

You and your managers should use a miniature work plan to develop
goals that are complete and useful (see Exhibit 1). In developing
the plan, the following five areas should be addressed:

* Goal–Be specific and concise.
* Measurement–What benchmarks will you use to measure whether
you have achieved your goals? These usually can be expressed
in quantitative terms.
* Major problems anticipated.
* Work steps–List three or four of the most essential steps.
Give completion dates for each.
* Supervisor’s goals–Employees should identify which of their
manager’s goals relate to their own goals.

On the work plan, managers can show each of the major work steps
(subgoals) necessary to reach a goal. If the work steps are
completed by the indicated date, the goal is reached.

Use the form in Exhibit 1 to discuss goals with your managers. By
looking at the form, you can see not only the goal but also the
plan for reaching that goal. This will allow you to (1) ask
questions about the work steps and any potential problems;
(2) decide the best way to evaluate progress on the goals and
(3) help each of your managers understand how his or her goals
relate to those of the company.

All problems listed on the work plan should include a solution.
For example, suppose the head of a supply department sets a goal
to deliver all packages within one day after they are received.
Because employees may have difficulty meeting the new deadlines,
the work plan should include necessary steps to teach them the
new procedures before the program goes into effect.

Exhibit 1 Plan to Achieve Objectives
SUPERVISOR: _____________________________________________________

OBJECTIVE #1: Increase gross sales margin of my area by 12 per-
cent by 9-1-92 and maintain at that level for remainder of 1992.

Major Action Steps J F M A M J J A S O N D

1. Decrease cost of serving small
accounts………………………………… x
a. Identify all customers not pur-
chasing $5000 per month………….. x
b. Determine sales potential of each
target customer…………………… x
c. If potential is less than $5000,
transfer to jobber………………….. x
d. Inform customer and schedule job-
ber visit with customer……………… x
e. If potential is $5000, develop co-
operative sales promotion program………. x
f. Implement program………………………. x
g. Evaluate and report results……………….. x

2. Increase minimum calls per sales-
person to 10 per day………………………… x
a. Analyze work methods of high call
salespersons……………………. x
b. Identify salespersons with fewer
than 10 calls placed…………….. x
c. Analyze territory and order of
calls……………………………. x
d. Determine best routing of calls……….. x
e. Determine most effective realign-
ing of all territories…………………. x
f. Implement plans……………………….. x
g. Evaluate and report results………………. x

Reporting Progress

An MBO program must include a provision for regular progress
reports. For this reason, the MBO concept is sometimes called
MBO/R, where the “R” refers to results. You and your managers will
only accomplish your goals or objectives if the MBO program calls
for a regular review of progress. For example, one large
organization issued nearly 100 pages of well-developed goals
prepared by many of its managers. The document was very
impressive, but it lacked a reporting system of any kind. You can
imagine the skeptical reaction of those who set goals for the
first year when they were asked the following year to draw up new

A monthly or quarterly review of progress toward goals will help
you determine where progress is below expectations. For example,
suppose that one of your goals is to reduce overtime work by
50 percent in one year, but you only reduce it by 15 percent in
the first quarter. Based on this information, you can exert a
special effort in the succeeding quarters to regain the lost

When progress is below expectations, you should identify the
problems holding back progress and assign someone to resolve
them. Failure to reach goals can result from

* The wrong objectives being established at the outset.
* Organizational restrictions being overlooked.
* Personal failure or a combination of factors.

In order to solve problems and meet a goal, managers may have to
adjust their time line or change the goal itself. All changes
should be written as new goals and included in the MBO files.

Evaluating Performance

In contrast to traditional methods, which evaluate performance
based on personal qualities such as leadership ability, the MBO
method evaluates performance based on objective results. Such
evaluation is a complex task that must be undertaken with care by
someone who fully understands MBO. (See Exhibit 2 for a
comparison of traditional and MBO evaluation methods.)

Under the MBO program, you evaluate your managers’ performance
based on whether they have achieved their five to eight goals.
You also must determine how well they have performed the
secondary duties that do not fall under goals. (See Exhibits 3
and 4 for examples of traditional and MBO performance evaluation
forms, respectively.)

Exhibit 2 – Comparison of Traditional and MBO Evaluation Methods
Characteristic Traditional method MBO method
Frequency Usually annually Usually quarterly.
(if at all).

Emphasis Traits. Results versus

Subordinate’s Mental block (doesn’t Positive (feedback
frame of mind know how “traits” will has told employee
be evaluated). how well he or she
is doing).

Suggestions for Poor receptivity (much Positive (much has
improvement has been based on em- been based on em-
ployee’s traits). ployee’s job per-

Tie in to rewards Rewards usually not Rewards usually tied
directly tied in. directly to results.

Summary Little connection to Results oriented.

Exhibit 3 – Example of Traditional Performance Evaluation Form
Above Below
Factor Excellent average Average average Poor
Degree of cost-
consciousness…………….. x
Grasp of function…..x
Relationship with
Ability to develop
Work habits…………………x
Contribution to com-
pany’s progress……x
Potential for ad-
Employee:_________________________ Rated by:_____________________
Date:_____________________________ Reviewed by:__________________
Acknowledgment: I acknowledge this performance appraisal has been
discussed with me. This acknowledgment does not constitute
agreement with the findings.

Signed:___________________________ Date:_________________________

Exhibit 4 – Results-Oriented Evaluation Form
Results achieved
Quarters Total year
Objectives Measure 1st 2nd 3rd
1. Improve by 10 1. At least three T O T Achieved in 97
percent number of qualified candidates percent of
qualified appli- referred for each cases.
cants referred job opening.
for job openings.

2. Increase by 12 2. Number of persons O T T 17 completed
percent number of completing basic course.
qualified welders welding course #5.
during 19xx.
Note: T = On target. No action necessary. O = Off target. Action


When installing an MBO program, start by asking your managers to
define their jobs, including their major responsibilities. Then,
for each responsibility, you and your managers must decide the
most effective way to measure performance in terms of results.

The outcome of this exercise may surprise you. You and your
managers may not agree on the major responsibilities of a certain
position. Also, you may find that no one is performing some
functions that you consider important. If the MBO system is to
succeed, you must show interest from the beginning and set the
example for your subordinate managers.

The education of your managers may be a formidable task. Until
this time, they have thought in terms of specific functions —
managing a sales department, directing a credit office, etc. —
rather than in terms of goals that contribute to the

One way to introduce the MBO system to your managers is in a
seminar conducted by you or a consultant. However, if you choose
a consultant, be sure that you are present for the entire
seminar. In this way, you will communicate to your managers that
the MBO system is a management priority.

During the seminar, ask each participant to prepare an actual
goal. Also, in small group sessions, have your managers review
each other’s work plans and offer suggestions to improve them.
The experience of setting and reviewing goals makes MBO a
learning experience for all employees.

Encourage your managers to express their doubts, reservations or
opposition to MBO. They should get their feelings out in the open
as soon as possible. You, the consultant or other participants
can help to ease their concerns.

In the beginning of your MBO program, your managers will have to
learn to measure their own performance accurately, anticipate
real problems that will thwart their progress and take steps to
solve delays and other problems. During this learning period,
your managers should set fewer goals than would usually be
expected, perhaps three or four. After they develop and achieve
these goals, they can extend the number and area covered by each

MBO may look simple on the surface, but it requires experience
and skill to make it work effectively. If managers set annual
goals, it may take three to four years before good results from
this new system appear.


Not all MBO programs are successful. Some of the reasons why
programs fail to reach their potential are

* Top management does not become involved.
* Corporate objectives are inadequate.
* MBO is installed as a crash program.
* It is difficult to learn the system
because the nature of MBO is not taught.

It is hard to get people to think in terms of results rather than
the functions of their job; however, it can be done. The sequence
of steps you use may not work for someone else. It is often an
individual matter. No matter what steps you use, the final
results are what count.

If you feel that you are ready to introduce MBO to your company,
why not set it as a goal for yourself? Turn back and follow
through with the work plan. List your goals, method of
measurement, anticipated problems and the work steps necessary to
get your company managing by objectives.

U.S. Small Business Administration (SBA)

The SBA offers an extensive selection of information on most
business management topics, from how to start a business to
exporting your products.

This information is listed in “The Small Business Directory”. For
a free copy contact your nearest SBA office.

SBA has offices throughout the country. Consult the U.S.
Government section in your telephone directory for the office
nearest you. SBA offers a number of programs and services,
including training and educational programs, counseling services,
financial programs and contract assistance. Ask about

– Service Corps of Retired Executives (SCORE), a national
organization sponsored by SBA of over 13,000 volunteer business
executives who provide free counseling, workshops and seminars
to prospective and existing small business people.

– Small Business Development Centers (SBDCs), sponsored by the SBA
in partnership with state and local governments, the educational
community and the private sector. They provide assistance,
counseling and training to prospective and existing business

– Small Business Institutes (SBIs), organized through SBA on more
than 500 college campuses nationwide. The institutes provide
counseling by students and faculty to small business clients.

For more information about SBA business development programs and
services call the SBA Small Business Answer Desk at 1-800-8-ASK-SBA

Other U.S. Government Resources
Many publications on business management and other related topics
are available from the Government Printing Office (GPO). GPO
bookstores are located in 24 major cities and are listed in the
Yellow Pages under the “bookstore” heading. You can request a
“Subject Bibliography” by writing to Government Printing Office,
Superintendent of Documents, Washington, DC 20402-9328.

Many federal agencies offer publications of interest to small
businesses. There is a nominal fee for some, but most are free.
Below is a selected list of government agencies that provide
publications and other services targeted to small businesses. To
get their publications, contact the regional offices listed in
the telephone directory or write to the addresses below:

– Consumer Information Center (CIC), P.O. Box 100 Pueblo, CO 81002
The CIC offers a consumer information catalog of federal

– Consumer Product Safety Commission (CPSC)
Publications Request
Washington, DC 20207
The CPSC offers guidelines for product safety requirements.

– U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
The USDA offers publications on selling to the USDA.
Publications and programs on entrepreneurship are also available
through county extension offices nationwide.

– U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Room 5898C
Washington, DC 20230
DOC’s Business Assistance Center provides listings of
business opportunities available in the federal government. This
service also will refer businesses to different programs and
services in the DOC and other federal agencies.

– U.S. Department of Health and Human Services (HHS)
Public Health Service
Alcohol, Drug Abuse and Mental Health Administration
5600 Fishers Lane
Rockville, MD 20857
Drug Free Workplace Helpline: 1-800-843-4971. Provides
information on Employee Assistance Programs.
National Institute for Drug Abuse Hotline:
1-800-662-4357. Provides information on preventing substance
abuse in the workplace.
The National Clearinghouse for Alcohol and Drug Information:
1-800-729-6686 toll-free. Provides pamphlets and resource
materials on substance abuse.

– U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with labor laws.

– U.S. Department of Treasury
Internal Revenue Service (IRS)
P.O. Box 25866
Richmond, VA 23260
The IRS offers information on tax requirements for small

– U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
401 M Street, SW (A-149C)
Washington, DC 20460
1-800-368-5888 except DC and VA
703-557-1938 in DC and VA
The EPA offers more than 100 publications designed to help small
businesses understand how they can comply with EPA regulations.

– U.S. Food and Drug Administration (FDA)
FDA Center for Food Safety and Applied Nutrition
200 Charles Street, SW
Washington, DC 20402
The FDA offers information on packaging and labeling
requirements for food and food-related products.

For More Information
A librarian can help you locate the specific information you need
in reference books. Most libraries have a variety of directories,
indexes and encyclopedias that cover many business topics. They
also have other resources, such as

– Trade association information
Ask the librarian to show you a directory of trade associations.
Associations provide a valuable network of resources to their
members through publications and services such as newsletters,
conferences and seminars.

– Books
Many guidebooks, textbooks and manuals on small business are
published annually. To find the names of books not in your local
library check “Books In Print”, a directory of books currently
available from publishers.

– Magazine and newspaper articles
Business and professional magazines provide information that is
more current than that found in books and textbooks. There are
a number of indexes to help you find specific articles in

In addition to books and magazines, many libraries offer free
workshops, lend skill-building tapes and have catalogues and
brochures describing continuing education opportunities.

About author

SMB Reviews
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