After showing how to prove the integrated c-theorem within the functional RG framework based on the effective average action, we derive an exact RG flow equation for Zamolodchikov's c-function in two dimensions by relating it to the flow of the effective average action. In order to obtain a non-trivial flow for the c-function, we will need to understand the general form of the effective average action away from criticality, where nonlocal invariants, with beta functions as coefficients, must be included in the ansatz to be consistent. Then we apply our construction to several examples: exact results, local potential approximation and loop expansion. In each case we construct the relative approximate c-function and find it to be consistent with Zamolodchikov's c-theorem. Finally, we present a relation between the c-function and the (matter induced) beta function of Newton's constant, allowing us to use heat kernel techniques to compute the RG running of the c-function.