Choose what the backdrop should be, and plan out extensively what needs to be drawn and painted onto the muslin. You should buy enough Non-Flame Retardant muslin to cover the back wall or open space that constitutes the backdrop area.
Stretch the muslin, and partially staple it down to wood posts in order to paint it. As you get the muslin ready for paint, to create a theater backdrop, keep in mind that you should use scenic paint which is made to work on non flame retardant materials.
Sketch the scene you wish to create for the backdrop in your theater. After a sketch has been made, use a primer paint in white first, and then paint your scene on the muslin. Make sure that the paint is thoroughly dried before you remove the muslin from the partially stapled and stretched form.
Add real, or plastic, trees and shrubs to the area in front of your muslin to add to the look of your theater backdrop. You can also create cardboard trees that you place at the wings of the stage to add to a forest or city street effect.
Use foam board, called TYPAR, for larger, non-prop effects that would not need to be moved. They can be cut with a razor, but they fall apart easily after they are painted. These can be used for trees, shop windows and other things that help you create a theater backdrop with flare.
Be creative. You don't need a huge budget, or lots of effects to create a beautiful and magical backdrop for any sized theater. Get your cast and crew to help with the preparation, and you can create any scene with the right materials and hard work.