So, here is how it is done (only for hand applique - this will not work for machine applique):
A - Cut out your paper template (remember .... your paper template) without any seam allowance. Place template on the back of fabric and pin in place. Be sure to leave enough material all around the paper template for seam allowance. B - Here is my template cut out showing seam allowance.
E - This is what the back will look like once your template has been basted.