So for this step you will take one end of the towel and fold it in half, hot dog style on top of each other. Fasten the sides together. This is the end that will be sewn together.
Once you've fastened one end, fold it (almost like origami) so that it looks like you're making a paper airplane by folding the corners to the center. I would then bring the corners (where I have mark 1 & 2) toward the unfastened end. This will add a slightly larger body to hold objects in. I would then hold up the bag and let the flap lay over the top of the pouch to get a reference of where the flap will be. You can make the flap as short or long as you want.
After you've folded the corners where you want them mark the positions of them with a marker. Mark on top as well as underneath the folded corner and on the flap right next to the corner but not on it. (See the close up pictures to get a better reference. You can flip step 2 & 3, the order of these doesn't really matter.)