From my understanding (which is poor at best), the cache is about the separate parts of the input context. Once the LLM read a file the content of that file is cached (i.e. some representation that the LLM creates for that specific file, but I really have no idea how that works). So the next time you bring either directly or indirectly that file into the context the LLM doesn't have to do a full pass, but pull its understanding/representation from the cache and uses that to answer your question/perform the task.