The town is primarily built on the northern shore of a large warm-water estuary, fed by the Knysna River. The estuary opens to the ocean after passing between two large headlands. These are popularly known as the "The Heads", and have become infamous due to the loss of boats and fishermen passing through their treacherous and unpredictable waters. Near them are geological formations, known locally as "The Map Stones." To the north of Knysna, Afro-Montane or temperate rainforest covers the hilly terrain for 20 km until changing to fynbos or macchia high up in the Outeniqua Mountains.
The early development of Knysna as a port was driven by the timber industry, where persons such as George Rex played a significant role. Being a difficult port to enter, a harbour pilot was employed to assist large vessels. One of the better-known pilots was John Benn, originally a shipwright from Mossel Bay, appointed as pilot in 1868 and whose name is borne by a double-deck pleasure cruiser currently operating as a tourist attraction on the Knysna lagoon. The port was officially closed in 1954.
The town is a popular destination for both tourists and senior citizens entering retirement, especially among the British and former expatriates due to the year-round warm climate. Recently the town has also become a preferred destination among golfers, as the town boasts several world class golf courses. Knysna too is a favourite haunt of artists, restaurateurs and hippies.