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There are two separate pieces when you are calling a function:

  1. A function declaration. This is mandatory and can only happen once for each function name.
  2. A function call. You don't need to use a declared function, and if you do, you can call the same function multiple times.

Both parts must happen in a PHP context, i.e. in a part that starts with </php and ends either with ?> or just with the end of the document. In other words: If there is no HTML after the opening PHP tag <?php you don't need to to close it. The end of the file is the same as ?>

An example: Let's declare a function in the theme's functions.php.

<?php
// function collection for the theme "WPSE Demo"

function html_wrap( $text, $tag )
{
    return "<$tag>$text</$tag>";
}

A functions.php never creates direct output, so we don't need a closing ?> in that file.

In a template file, we can now call that function multiple times:

<?php
echo html_wrap( 'Hello World!', 'h1' );
echo html_wrap( 'Here I am.', 'p' );
?>

We need the PHP tags around these calls. Note that some theme authors are using PHP tags around every single function call in templates. They'd write the example above like this:

<?php echo html_wrap( 'Hello World!', 'h1' ); ?>
<?php echo html_wrap( 'Here I am.', 'p' ); ?>

Don't do that. It is harder to read and to change. It looks messy, and technically it is just redundant. Plain poor code style.