@kainosnous: In general:
- Enter $LFS/sources,
- Unpack package,
- Enter package directory,
- Follow instructions given for specific package.
So in your case you should enter $LFS/sources, unpack binutiles (tar jxfv binutils-2.20.tar.bz2), enter newly created dir (cd binutils-2.20). And from this point on you follow the instructions in chapter 5.4, starting with th creation of the binutils-build directory.
This is mentioned in chapter 5.3 (last Important box)....
Hope this helps.