Well, there used to be a sensible system. The yarn came in, it went into the Box, then into the Knitting Bag when the project was all ready to go. But then, both the Box and the Knitting Bag got full, so it evolved. Now I look at it, the system is rather complicated.
The yarn is bought, and often cuddled for a bit or left somewhere in my eyeline for an evening. It then goes into the Sheep Bag if I'm inspired about it, or into the Box if not. But I've always had an idea for something to do with yarn when I buy it, even if I then decide it's a bad idea. When I've nearly finished a project, I have a look through the Sheep Bag to see what lurks within. Once I've actually finished the project, something gets pulled out of the Sheep Bag and becomes the next project. There's also the pattern folder and the Dalek, that's been hibernating for a good long while now.
When something is actually being knitted, it gets put into the Spotty Knitting Bag. Within that are usually a few project bags and my notions case (though there are more notions in the front pocket, too). This is the bit I'm most proud of because, until today, it was the only part that anyone else saw, and I do take care of it, organise it and clear it out often. These project bags occasionally get pulled out and dragged off to a knitting group or on a long train journey.
The original Knitting Bag is now kept indoors (it is less waterproof...), and used for storing needles, more notions, and all the sewing things and cross-stitch kits. It was cleaned out about a month ago, though I think I need more storage within it - particularly for my interchangeables which are still in their not-great-quality case they came with.
This has also spread to my parents', where I have a work-desk-come-craft-desk, which has a drawer of 'Wool I'm not sure why I own' - mainly stuff given to me by generous relatives that I have never had an idea what I'm going to do with it, so when I go home I open the drawer and wait for inspiration. So far, I've been doing this twice a month since Christmas, and no joy.
In terms of projects, I try to keep myself up-to-date on Ravelry with mixed success (for example, some projects have now been given away and I haven't taken photos of them). I have a project notebook that is woefully out of date, but I will now have a go at it this weekend. Overall, it is a system that works and I understand, and can deal with change to how many projects are ongoing, or how much wool I have lying about.