Why tool length offsets matter
Every tool in a magazine sits at a slightly different length, and the machine has no way of knowing that difference on its own. Tool length offset is what tells the control how far each tool sticks out relative to a reference tool, so a program written for one tool length still moves to the correct Z height no matter which physical tool is actually in the spindle.
How the number is calculated
The offset is simply the reference tool length minus the current tool length. A tool shorter than the reference tool gets a positive offset, telling the control to move further down to reach the same surface, while a tool longer than the reference gets a negative offset. That value gets entered directly into the tool's H offset register on the control.
Practical tips
Always measure tool length the same way every time, either from the same reference surface on a tool presetter or from the same gauge line on the spindle, since inconsistent measurement technique is the most common source of a wrong offset. Double-check the sign of the offset before the first cut on a new tool, since a reversed sign sends the tool the wrong direction and can crash it into the part or the table.