There are 3 things that cause fabric to shrink: water, heat, agitation. By hand washing, you are not getting the full benefit, but at the end of the day, how much is it really worth to you to get that extra 1-2% shrinkage? If I really wanted it to turn out nice, I would probably fill the tub or a large sink with plenty of very warm (not hot!) water and some detergent. Then, I would get an old wooden spoon, paint stirrer or a large stick from the yard (try to get it a bit clean before using) and would do my best to really stir up the fabric in the water (hence the need for something deeper than bathroom sink). Finally, I would partially dry with a hair dryer on medium heat. Doesn't need to dry all the way, just about 25-50% of the way dry.
Some people also say they get the flannel to fully shrink by boiling water, turning off stove & immediately adding the fabric. That would shrink it, but it's also liable to damage the cotton fibers and fade the color. But we each need to make our own decisions based on time, money & resources. It will be a lovely quilt regardless and you got a great deal on it! Sewing flannel with a 1/2" seam will help make up for any lack of shrinkage in the pre-wash stage.
Be sure to post a pic for us to admire when it's done!
