Step 4: Making the Embouchure
Start with about 45 degrees between the outer and inner edges. Depending on the size of the tubing compared with the diameter of the embouchure hole, it may not take much to reach the right angle, but it is critical to getting the most out of the flute. More filing is needed on larger pipes and on smaller embouchure holes to get to the correct angle. It may be easiest to go ahead and finish the rest of the instrument so it is playable, and then tweak the blown edge until you can get the best tone and control. But don't get greedy: you can always take off more material later but you can't put more on.
Edit: Thought I'd add a picture to clarify how to undercut the embouchure as I've gotten a few of questions about it. The flute will probably work without any undercutting, but they are much easier to play over a wider range with the right angle and a sharp edge. The blown edge is to the right in the new image. After the hole is drilled (the straight lines), undercut the side of the hole by removing the red material in the image. Make sure the edge marked by B stays sharp and the surface marked by A stays straight and smooth. Don't remove any material from the outside of the tube, only from the inside surface of the hole. After you're done undercutting the blown edge, the tube and hole should look no different from the outside from when you first drilled it.