The free cancellation period is the number of hours prior to the start of a booking, before which a customer can cancel for free. After that the customer gets a 60% refund and you get the rest.
You set the free cancellation period for each of your skills. This means that each skill can have a different one.
It is up to you to decide what's reasonable for the skill you're teaching. For example, if you need to prepare or buy in supplies before a booking, it might make sense to not allow the customer to cancel for free right before the booking starts. However, you shouldn't make the free cancellation period arbitrarily long, as this might also scare away potential customers.