Hi Dan,
I have been told that this has been solved in SME 5.0, in e-smith 4.1.2 there is a bug.
The two most important directives that you might want to change (make a template-custom of course) are:
cache_mem 8
I have increased it to 20 (MB) in a 256 MB RAM machine. You should expect squid to use 2x to 3x this memory to work
cache_dir ufs /var/log/squid 100 16 256
Here is where I found the bug in 4.1.2 (already reported). You need to uncomment the line, specify ufs as the filesystem type (in 4.1.2 this is missing) and increase 100 to say 300 (MB)