Well if you're using the Mach3 Wizzards, you enter the tool information in the particular wizzard that you're using.
Tool definitions are inputed into the software that you're using to translate your CAD drawings into G-Code (i.e. MeshCAM, CAMBAM, etc.).
Mach3 take the G-Code from the tools above and does all the step and direction stuff to make the machine move.