When using soft cloth physics what iClone is doing is calculating the effect of movement of the cloth, the interaction of the cloth with other objects, etc. For best results you would normally run this simulation By Frame, which is less then real-time, but more precise. Therefore, once you are pleased with the result, you can have iClone bake the soft cloth effects into an animation clip for the cloth object. After that you switch soft cloth physics off for that particular object. However, because the animation has been baked, you will still see the cloth effects, which you can now play back real-time.
That is sort of a simple explanation. Baking is just a way to solidify a particular simulation into an animation clip.