Some economists are pointing to a downturn in 2008 -- but no one really knows. So, while your CFO won’t let you actually plan for a weak economy, if the economy does soften, you will face explaining a budget shortfall that may already be in progress. Is there a best way to handle such conversations?

Yes. Managers can take several steps to ease the pain of delivering disappointing or ambiguous news -- and perhaps even gain some respect in the process.

1) Lay the groundwork now. Given that the average manager stays in his job less than three years, neither you nor your boss were likely in your current jobs during the last recession. So do your homework. Did your department’s volume decline in 2001? By more or less than the economy as a whole? By more or less than other parts of the company? Have the changes in your business mix since then made your department more or less vulnerable?

Homework in hand, you can have a conversation with your boss now as to what impact a recession could have, and whether to develop contingency plans -- before the pressure cooker of underperformance clouds both of your perspectives.

2) When the problems start, be ready with a plan -- but also with choices. Bad managers report the news and ask their bosses what to do. Good managers have a plan appropriate to the circumstances and to their belief in the best trade-off between short and long term objectives. However, the best managers go one step further -- they genuinely involve their bosses in making the decision by giving them real choices (for example, “I would personally begin these expense reductions today. However, I recognize that will make us more vulnerable to competition if the recession turns out to be shallow. Therefore if you want to protect the upside, we could choose instead to…”)

3) Deliver on the contingency plan. This will not be the first time your boss has dealt with a budget shortfall. Your credibility will not be destroyed by one missed forecast. That said, your standing will be dealt a heavy blow if you must come back repeatedly to report “It’s worse than we thought.” So do not sugar coat the bad news the first time. Own up to the full impact of the shortfall, and make sure you deliver what you now say you can.

MORE ON MANAGING DURING UNCERTAINTY:
HarvardBusiness.org's Downturn Survival Guide
Strategies to Prevent Economic Recessions from Causing Business Failure (Business Horizons Article)
Moving Upward in a Downturn (HBR Article)
Leading Through Rough Times: An Interview with Novell's Eric Schmidt (HBR Article)
Five Missteps to Avoid in Volatile Times (HMU Article)