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What does it mean when it says enter a phone number where you can be reached it will be shown on this iPhone after it has been erased does it mean that the iPhone will text my all contacts

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If an honest person finds your phone, they need to know who to contact to give it back.

As they cannot get into the phone itself because it is locked to your ID/thumbprint, then the contact number can be displayed on the lock screen.

Personally, I have my emergency contact number embedded into the lock screen photograph itself - in case of accident & you haven't triggered the Find My iPhone functionality.

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This number is used for being called from the iPhone, that's all. Entering a number means a button is shown on the iPhone display, and tapping the button will initiate a phone call from the iPhone to the number you provided. Your contacts are not contacted.

https://www.engadget.com/2014/05/01/iphone-101-how-to-use-lost-mode-to-find-a-missing-ios-device/

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