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 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 including Pezula Golf Course, Simola Golf Course and the well established Knysna Golf Course situated on the lagoon. Knysna too is a favourite haunt of artists, restaurateurs and hippies. The nearest beach is located at Brenton-on-sea which lies directly west of the heads and is continuous with Buffels Bay, a popular surf spot. Knysna's other claim to fame is the home to the fabled Knysna forest elephant.