In order you use that function you need to have command line access to the mysqldump command. Alot of shared hosts won't allow you to do that, so this feature won't work.
If that's the case, you need to use something like phpMyAdmin to backup your database.
If you do have the ability to run mysqldump from the command line, then there are a couple of things to check in your config file. One is the path to the mysql commands. And the other is the path to where the backups are stored. Also make sure this location is writable.