Where should functions in function components go? 

It is technically possible to define functions inside functional components as in the following example:

function App() {
  let test;
  
  function myInsideFunction() {
    test = "TEST";
  }
 
  myInsideFunction();

  return (
    <div>
      This is a working {test} component 
    </div>
  )
}

The main issue with the above example is that myInsideFunction is going to be defined every time the App component is rendered.

To avoid this re-rendering you can just refactor myInsideFunction to be outside of the component like this:

function myInsideFunction() {
  return "TEST";
}

function App() {
  let test;
    
  test = myInsideFunction();

  return (
    <div>
      This is a working {test} component 
    </div>
  )
}

If the myInsideFunction function had functionality that was useful outside of the App component then this would help as any component would now have access to the function.