In this work it is established for the first time that the internal parameters of the electrical equivalent circuit of vanadium redox flow battery (VRFB) are variable not only with flow rate and stack current but also the state of charge (SOC) and operational cycle number. The dynamic internal circuit parameters are extracted by using the charge-discharge characteristics of a practical 1 kW 6 h VRFB system as input to the proposed model. The role of temperature on the VRFB internal parameters is also discussed. It is further demonstrated that the average error in estimation of VRFB stack voltage using dynamic parameters reduces by 28% (charging) and 14% (discharging) compared to that of using static internal parameters. The proposed model exhibits robustness and validity for large scale applications as evidenced by further extracting the internal parameters of a 125 kW 2h VRFB system. Another significant contribution of this paper is the optimization of flow rate by considering both the stack internal power loss and pump power loss simultaneously to achieve optimal performance of the VRFB system. The proposed model involving dynamic parameter extraction and loss optimization is very useful for designing suitable battery management system (BMS) for interfacing VRFB with renewable energy sources.