Adjusting the clutch cable
The cable is adjusted by checking the amount of freeplay at the clutch lever. Free play is the amount that the lever moves before it actually starts putting any pressure on the cable.
To adjust freeplay:
Measure free play as so:
Adjust the clutch end first. Make sure the clutch lever is pushed up, removing any play from the lever.
Now adjust the cable to remove most of the free play. Make sure to tighten both locknuts.
The clutch cable tends to break more often than many people think it should, usually right here:
Since dealers quite often don't have these in stock, you might want to get a spare cable and zip-tie it to the current one. Should your cable break, it is just a matter of hooking up both ends and you are on your way home. That or shifting clutchless for the rest of your ride.
Alternative adjustment method
Wes doesn't measure the free play distance, but likes it to engage when the lever is about 1 inch away from the handlebar. That way there is enough movement that the bike doesn't creep forward when the lever is pulled all the way in, but it moves when the lever is released. He does it that way to try to prevent fatigue in his clutch hand. It doesn't seem to cause excessive wear on the clutch plates.
The book says 2-3mm slack in the cable. Wes leaves about 15mm because he doesn't like the stock lever throw. This has the side effect of rattling like hell, though.
The key: you need SOME slack to make sure the clutch engages fully. You also need to make sure the clutch disengages fully when the lever is at the bar. You can tell if this is the case or not by listening to the pitch of the engine as you shift from neutral to 1st with the clutch in on a hot motor. The sound should NOT change.
As long as those two points are met, it doesn't really matter what you do. It's all personal preference. However, by the book is best, at least until you are familiar with your bike.