After a few tries, I found I like a circle in the middle of the fabric, rather than a slit. When I cut it, I quartered the fabric, cut a curve to create a hole a little bigger than her neck, then cut a slit down in front to provide enough room for her head to fit through.
As for size, with the fabric folded in half, if you place a sweatshirt over it and make your fabric the width and height of the sweatshirt, and then cut your fringe, it's just right.
The kids also had some fleece blankets that we put holes in so they could have ponchos, too. Now they can sleep with them, or wear them! (But I wouldn't recommend sleeping in them).